IHSGlobalInsight Pakistan2010

IHS Global Insight Report: Pakistan (Country Intelligence)
Report printed on 30 October 2010
CONTENTS
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Executive Summary
Copyright ©2010 IHS Global Insight Inc. All rights reserved. Page 1 of 71
Current as of Fri 29 Oct 2010
Executive Summary: Key Issues to Watch
Militants Remain Potent Despite Large-Scale Military

Six-Factor Country Risk - Pakistan
Offensives: Under heavy U.S. pressure, the Pakistani military has
Risk Score Description
waged major military operations against the Pakistani Taliban
since May 2009. Since then, partial victories were declared on Political 4.25 Very High
numerous occasions. However, while militants are increasingly Economic 4.00 Very High
denied access to territory, they are more likely to have been
Legal 3.75 High
dispersed rather than defeated, and have evidently retained their
Tax 3.50 High
ability to strike. After a short lull of terrorist activity in early 2010 a
spate of recent attacks underscored the continued ability of the Operational 4.00 Very High
Taliban to carry out attacks, including on high-security targets. Security 4.50 Extreme
Overall 4.01 Very High

Possible Political Fall-Out After Devastating Floods: The worst
monsoon floods in its history hit Pakistan in late June 2010, 12-Month Rating Negative
Trend Trend
claiming the lives of 1,600 people and leaving one-fifth of the
country under water. Socio-economic distress and hardship in the Note: 1 = minimum risk, 5 = maximum risk. Ratings form
part of enhanced Country Analysis & Forecast suite of
aftermath of the flood bears the possibility of a wider political
services. Subscribers can access full table and
fall-out in the short and medium term. While so far there has only methodology here.
been sporadic unrest, it can be expected that this will grow in scale
Sovereign Risk Ratings - Pakistan
and intensity in line with soaring food inflation and scarcity, and
unemployment. The fact that the government has been criticised by Possible
Medium-Term
65(CCC) Default
flood victims to provide inadequate support also raises fears that
militants could take advantage of the situation.. Sovereign Risk
Stable
Outlook
Heavy Floods Threaten to Slash Economic Growth: The floods Note: 0 = minimum risk, 100 = maximum risk. Ratings form
are likely to have a staggering effect on Pakistan's economy. Major part of enhanced Economic and Sovereign Risk services.
Subscribers can access full table and methodology here.
setbacks will come from the damaged agricultural sector that
accounts for about 20% of GDP. Industrial production and
manufacturing will also be affected, as the floods have destroyed infrastructure and cotton crops. As a result, the trade
balance will deteriorate on falling exports and soaring import requirements. Meanwhile, significant supply shortages will
fuel inflation, further accentuating the country's macroeconomic imbalances. The early estimates of the damage already
suggest that the government's real growth target of 4.5% for fiscal year (FY) 2011 (started 1 July) could be missed by
more than one percentage point.
IMF Fiscal Deficit Target Seems Unrealistic: The new FY 2010/11 budget unveiled in June aims for a fiscal deficit of 4%
of GDP, in accordance with the deficit limits agreed on with the International Monetary Fund (IMF). The budget projections
are based on assumption of almost 20% increase in tax revenue mobilisation. While this assumption alone might prove to
be optimistic, fiscal consequences of the flood rehabilitation will drive the budget balance further into the red. This,
however, is unlikely to affect the release of the remaining portion of the IMF's US$11.3-billion loan or prevent the country
from receiving additional financing beyond the current stand-by arrangement.
Strategic U.S.-Pakistan Relations: U.S. president Barack Obama has made the nexus between Afghanistan and
Pakistan a key component of his previous Af-Pak strategy, and this focus remains in the new Afghanistan strategy that
was announced in December 2009. In March 2010 the United States and Pakistan in comprehensive consultations in
Washington, D.C., vowed a new chapter in their bilateral relations, which is likely to see more co-operation between the
two countries in the near future. However, this does not disguise the fact that bilateral relations remain fraught with tension
in a variety of areas, including on suspected U.S. drone strikes that target militants in the northwest of the country. Most
recently, this showed in October 2010 when Pakistan temporarily suspended access to the crucial Torkham border
crossing with Afghanistan after a NATO cross-border helicopter strike killed at least two Pakistani troops.
Key Macro-Economic Indicators
2006 2007 2008 2009 2010 2011 2012 2013 2014
Real GDP (% change) 6.2 5.7 2.0 3.6 4.3 2.5 6.3 4.6 4.7
Nominal GDP (US$ bil.) 126.5 142.8 146.1 156.5 172.8 195.0 210.3 212.9 226.8
Nominal GDP Per Capita (US$) 746 825 825 866 935 1,033 1,090 1,080 1,127
Consumer Price Index (% change) 7.9 7.6 20.3 13.6 14.0 12.6 8.3 6.7 7.5
Exchange Rate (LCU/US$, end of period) 60.92 61.22 79.10 84.26 86.49 86.55 99.01 100.41 106.65
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on
the 15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the
release of the GIIF bank.
Download this table in Microsoft Excel format
Executive Summary: Political Outlook
Possible Political Fall-Out After Devastating Floods: The worst monsoon floods in its history hit Pakistan in late
June 2010, claiming the lives of 1,600 people and leaving one-fifth of the country under water. Socio-economic
distress and hardship in the aftermath of the flood bears the possibility of a wider political fall-out in the short and
medium term. While so far there has only been sporadic unrest, it can be expected that this will grow in scale and
intensity in line with soaring food inflation and scarcity, and unemployment. The fact that the government has been
criticised by flood victims for providing inadequate support also raises fears that militants could take advantage of
the situation.
Parliament Passes Major Constitutional Amendments: Pakistan's lower house of parliament on 18 April
unanimously passed the landmark 18th amendment to the constitution of 1973 that is aimed at strengthening the
precarious state of democracy in the country. The amendments strip the country's president of many of his powers,
rendering him a ceremonial figurehead and transferring most executive power to parliament. In particular, this
includes the president's powers to dismiss the prime minister, to dissolve parliament and to appoint the country's
army chief. However, it is unclear whether this measure will provide for a greater degree of political stability.
Heavy Reliance on External Aid Hampers the Government's Credibility Domestically: The international
community has in the past expressed concerns over the sustainability of the Pakistani government's wavering
policy towards militants, which has permitted militants to consolidate their position and escalate attacks in
neighbouring Afghanistan. As a measure to push the Pakistani government to strengthen its drive against
extremism, the United States has passed two massive aid bills. However, U.S. aid to Pakistan has not been
uncontentious, given that the tough restrictions on military aid to Pakistan have sparked tensions between the
United States and Pakistan, and within Pakistan between the civilian government and the military. Pakistan has
bitterly complained that the conditions constitute an attack on its sovereignty, a notion that sits unwell in a country
in which large parts of the population share anti-U.S. sentiments.
Executive Summary: Political Data

Key Figures
Title Name Appt Date
President Asif Ali ZARDARI 06 September 2008
Prime Minister; Information Technology Yusuf Raza GILANI 25 March 2008
Minister of Finance Abdul Hafiz SHEIKH 05 June 2010
Minister of Investment and Privatization Waqar Ahmed KHAN 27 April 2009
Minister of Foreign Affairs Makhdoom Shah Mehmood QURESHI 25 March 2008
Minister of Defence Chaudhry Ahmed MUKHTAR 25 March 2008
Minister of Defence Production (vacant) 27 September 2010
Minister of Petroleum and Natural Resources Naveed QAMAR 08 August 2009
Minister of Labour and Manpower Khursheed Ahmed SHAH 03 November 2008
Minister of the Interior Rehman MALIK 03 November 2008
Minister of Ports and Shipping Babar GHAURI 27 April 2009
Minister of Railways Ghulam Ahmed BILOUR 03 November 2008
Minister of Health Makhdoom SHAHABUDDIN 10 December 2009
Minister of Education Asif ALI 05 June 2010
Senior Minister; Minister of Commerce Makhdoom Amin FAHIM 03 November 2008
Parliamentary Data
Chamber Party/Group Name Acronym/Abbreviation Seats
National Assembly (Lower chamber) Pakistan People's Party (Parliamentarians) PPP 89
National Assembly (Lower chamber) Pakistan Muslim League (Nawaz) PML(N) 68
National Assembly (Lower chamber) Women W 60
National Assembly (Lower chamber) Pakistan Muslim League (Quaid-e-Azam) PML(Q) 42
National Assembly (Lower chamber) Independents Ind 29
National Assembly (Lower chamber) Others Others 25
National Assembly (Lower chamber) Muttahida Qaumi Movement MQM 19
National Assembly (Lower chamber) Non-Muslim minorities N-M 10
Senate (Upper chamber) Pakistan People's Party (Parliamentarians) PPP 27
Senate (Upper chamber) Others Others 23
Senate (Upper chamber) Pakistan Muslim League (Quaid-e-Azam) PML(Q) 21
Senate (Upper chamber) Independents Ind 13
Senate (Upper chamber) Muttahida Majlis-e-Amal MMA 9
Senate (Upper chamber) Pakistan Muslim League (Nawaz) PML(N) 7
Political System Data
Next Total Total
Next Last
Lower Last Lower Upper Lower
Government Type Presidential Presidential
Chamber Chamber Election Chamber Chamber
Election Election
Election Members Members
Federal Constitutional 2013 6 September 2013 18 February 2008 100 342
Republic September 2008. February (National Assembly); 4
(parliamentary/presidential) March 2009 (half of
Senate).
Sources: CIRCA, IHS Global Insight. Please Note: Parliamentary data show distribution following last general election. Spellings of
individuals' names in the government list may differ from those used elsewhere on the service.
Executive Summary: Economic Outlook
Growth will be hampered by severe flooding. We have revised our September forecast for Pakistan in line with
the latest available estimates for the flood damage that struck the country in late July 2010. While substantial
losses of wheat stock are likely to result in the revision of real growth for fiscal year (FY) 2010 (ended 30 June),
which has been preliminary estimated at 4.3%, a major correction to real growth will take place during FY2011.
The changes to the near-term outlook consist of the downward adjustments on the supply side and some possible
upward adjustments on the demand side. Major supply setbacks stem from direct losses in agriculture and
manufacturing, as well as indirect effects of the lost capital stock on the industrial production. On the other hand,
aggregate supply may see a boost in the near term, supported by reconstruction-related consumption and
investment. Overall, real growth is likely to be a couple percentage points below our previous projection and
average about 2% in FY2011.
Difficult fiscal stance will remain a major challenge to the recovery. The new FY2011 budget revealed in June
2010 has targeted a deficit of 4% of GDP—in line with the limits agreed on with the International Monetary Fund
(IMF). While some of the budget projections already seemed to be overoptimistic, including a 19% increase in
tax-revenue collection, the flood has made the current fiscal-deficit target unachievable. A large fiscal gap will be
partially financed by donors, but the government's domestic borrowing from the banking system is also likely to
increase, intensifying the risk of crowding out the private-sector credit that would circumscribe growth and create
additional pressure on the future debt-sustainability framework. Timely introduction of the value-added tax and
elimination of power subsidies also remains under question, suggesting that the fiscal reforms will experience new
pitfalls.
The US$11.3-billion IMF loan program will be fully realized but might need a follow-up. Despite Pakistan's
evident inability to meet the fiscal and macroeconomic targets, the IMF has committed to continue its financing to
Pakistan under the US$11.3- billion stand-by arrangement agreed upon in November 2008. In addition, in
response to the flood, the IMF will provide US$450 million in immediate assistance. New performance targets for
the sixth tranche of the loan of US$1.6 billion will be discussed later this year. As the program is due to be
completed by the end of 2010, it is also likely that Pakistan will go into another IMF program that will take into
account post-immediate financing needs incurred by the flood.
Executive Summary: Selected Charts and Data
Key Macro-Economic Indicators
2006 2007 2008 2009 2010 2011 2012 2013 2014
Real GDP (% change) 6.2 5.7 2.0 3.6 4.3 2.5 6.3 4.6 4.7
Policy Interest Rate (%) 9.50 10.00 15.00 12.50 13.50 13.00 12.00 11.00 10.92
Population (mil.) 169.47 173.18 176.95 180.81 184.75 188.79 192.92 197.10 201.31
Unemployment Rate (%) 6.2 5.3 5.2 5.5 5.8 6.3 6.2 6.0 8.5
Current Account Balance (% of GDP) -5.3 -5.8 -10.7 -5.3 -2.1 -3.2 -2.9 -2.9 -3.0
BOP Exports of Goods US$bn 17.0 18.2 21.2 19.8 21.7 22.8 24.8 28.3 31.3
Executive Summary: Key Sectors

Pakistan: Top-10 Sectors Ranked by Value Added
2008 Level 2009 Percent Change Percent Share of GDP
(Bil. US$) (Real terms) (Nominal terms)
1. Agriculture 29.9 -3.1 17.8
2. Retail Trade - Total 13.8 0.0 8.2
3. Wholesale Trade 11.1 -0.3 6.6
4. Public Admin. and Defense 10.0 0.9 5.9
5. Telecommunications 9.0 1.4 5.3
6. Health and Social Services 7.5 1.4 4.4
7. Hotels and Restaurants 6.7 -0.4 4.0
8. Education 5.8 1.1 3.5
9. Oil and Gas Mining 5.6 0.1 3.3
10. Construction 3.7 -1.2 2.2
Top-10 Total 103.1 61.3

Source: World Industry Service, IHS Global Insight, Inc.
Updated: Aug 25, 2009
Executive Summary: Key Trading Partners
Pakistan: Major Trading Partners - 2008
EXPORTS IMPORTS
Country Billion US$ Share (%) Country Billion US$ Share (%)
United States 3.480 16.094 China 6.591 14.282
United Arab Emirates 2.538 11.735 Saudi Arabia 5.621 12.181
Afghanistan 1.865 8.625 United Arab Emirates 5.223 11.319
United Kingdom 0.969 4.479 Kuwait 2.519 5.460
China 0.916 4.234 United States 2.192 4.751
Germany 0.827 3.822 Malaysia 1.906 4.130
Saudi Arabia 0.717 3.316 India 1.704 3.693
Italy 0.662 3.062 Japan 1.599 3.466
South Korea 0.574 2.653 Germany 1.365 2.958
Turkey 0.533 2.465 Singapore 1.302 2.821
Source: IMF, Direction of Trade
Executive Summary: Key Regulatory Issue to Watch

Supreme Court Walks Tightrope Between Strengthening Rule of Law and Political Turmoil: The Supreme Court in a
landmark ruling on 31 July 2009 declared former president Pervez Musharraf's brief imposition of a state of emergency
from 3 November to 15 December 2007, issued under the Provisional Constitution Order (PCO) No.1 of 2007, to be
unconstitutional. The court in a separate ruling also declared invalid Musharraf's subsequent appointments of more than
61 judges to higher and lower courts under the Oath of Office (Judges) Order, 2007. In a subsequent step, the National
Reconciliation Ordinance (NRO), which protected 8,000 beneficiaries including president Asif Ali Zardari from graft
charges was declared illegal. These are broadly positive steps that indicate the increasingly independent nature of
Pakistan's notoriously politicised judiciary, although a long list of constitutional changes will be necessary for it to become
truly independent. Most importantly, the Supreme Court has to be careful not to cause political turmoil, as may well be the
case now that Zardari's eligibility for being president could be challenged.
Executive Summary: Legal Environment Overview

Neglect, corruption and a general lack of funding have produced a number of problems for Pakistan's legal system.
Difficulties include long delays, the lack of a centralised co-ordinating body to develop policy, a lack of professional
management and a shortage of judges, inadequate infrastructure, and meagre public access to justice. These factors
have been exacerbated by a decline in the standard of legal education and professional standards, and sometimes undue
political influence on the judiciary. Some changes have been made, but overall the legal system needs extensive
development. It is widely mistrusted, partly for its slowness, but largely because it is seen to be corrupt and a tool of the
administration. The legal system is not perceived as intrinsically anti-foreign, but its apparent inability to respond quickly
makes it an inherent obstacle to business. Significant problems remain unaddressed, although the system has potential
for reform. Positive moves have been made by the Supreme Court in 2009 that generally aim at strengthening the rule of
law, including declaring the November 2007 state of emergency and laws passed during this period as unconstitutional
and invalid, and the rescinding of a controversial graft amnesty.
Executive Summary: Key Taxation Issue to Watch

Tax Reform Inching Forward: Pakistan's tax system is underdeveloped, and suffers from a low tax-to-GDP ratio, a
narrow tax base in which only certain sections of society are taxed, tax evasion due to weak audit and enforcement
procedures, and lack of transparency. There have been moves by the Pakistani authorities to improve the system, and
slow progress is being made, particularly since tax reforms are part of the conditions that the IMF set in return for the
disbursal of a massive bailout package in November 2008, with the institution continuing to press Pakistan to speed up its
reforms. One of the key components of tax reforms will be the introduction of a value-added tax (VAT) system in
mid-2010, which will replace the general sales tax (GST) system currently in place.
Executive Summary: Tax Environment Overview
Pakistan's tax system is underdeveloped and is not conducive to carrying out business with any ease. It suffers from one
of the world's lowest tax-to-GDP ratios, a narrow tax base in which only certain sections of society are taxed, tax evasion
due to weak audit and enforcement procedures, and lack of transparency. There have been moves by the Pakistani
authorities to improve the system, and slow progress is being made, particularly since tax reforms are part of the
conditions that the IMF set in return for the disbursal of a massive bailout package in November 2008. As part of the tax
reforms the government aims to introduce a single-rate value-added tax (VAT) to replace the multiplicity of rates of the
current general sales tax (GST) system, although the implementation has been repeatedly delayed. It is now envisaged to
become effective from 1 November 2010.
Executive Summary: Key Operational Issue to Watch

Power Deficit Looms: Pakistan faces a power deficit of up to 5,000MW, which has led to a number of major power
outages in recent years. Most major cities in Pakistan experience daily power outages while rural areas can spend up to
18 hours a day without power. This has been fuelled by the lack of adequate generating capacity, due to a lack of power
stations, an inefficient grid system, a lack of water for hydropower facilities, and the delay of several major hydropower
projects due to local opposition and funding. The theft of electricity from power lines and the government’s inability to
restart the market liberalisation initiatives, started by President Pervez Musharraf in 2002 but became stalled in 2007 amid
the country’s growing political unrest, has further exacerbated electricity shortages. Power cuts have caused significant
business interruption and although many businesses are equipped with generators few private households have them, as
they become increasingly expensive to use amid the rising cost of diesel, petrol and liquefied gas.
Executive Summary: Operational Environment Overview

The Pakistani government is actively encouraging foreign investment, but faces formidable challenges in its attempts to
improve the operational environment. Corruption remains endemic at all levels and officials often demand kickbacks.
Bureaucracy is slow and obstructive, and the infrastructure—particularly in the transport sector—falls well short of
desirable standards. Inconsistent policy implementation also poses problems. The government's anti-corruption and
privatisation drive has slowed down significantly amid severe political and security instabilities, which has left numerous
sectors, such as power, agriculture, and financial services in dire need of reform.
Executive Summary: Key Security Issue to Watch

Despite Declaration of Major Anti-Militant Successes the Security Situation Remains Extremely Volatile: Pakistan's
security problems are a major cause for concern, both domestically and internationally. Topping the agenda is the issue of
Islamic extremism. It has become clear that Pakistan, which once fostered the extremist element against the likes of India,
has now become a victim of the problem, with extremist violence now seriously destabilising the country. Since early May
2009 the Pakistani military has waged a decisive military operation against the Pakistani Taliban, and has announced
major strategic victories. However, this is unlikely to bring peace to Pakistan as the Taliban are likely to have been
dispersed, rather than defeated, rendering the conflict a de-territorialised one that is likely to increase insecurity throughout
Pakistan. The Taliban have threatened massive attacks in retaliation for the Pakistani Army’s military campaign, and a
string of well-planned terrorist attacks, including against foreigners, leaves no doubt as to their capabilities to follow up on
this. The massive floods of July and August 2010 have exacerbated the risk of militants gaining public support in areas
where the government response is perceived to be inadequate.
Executive Summary: Security Environment Overview

Pakistan's domestic security situation is extremely complex. The massive military campaign of the Pakistani Army against
Islamic militants in the northwest of the country has brought about a de-territorialisation of conflict, meaning that the
danger of terrorist attacks, especially against Western targets, is very high throughout Pakistan. In addition to the
presence of al-Qaida and reformed remnants of the Taliban regime along with their fresh Pakistani recruits, a number of
Islamic extremist groups operate in the country. The massive floods of July and August 2010 have caused considerable
socio-economic hardship to millions of people, and the perceived inadequate response of the government has increased
the risk of militants stepping in to the void, while social unrest and crime are likely to increase. Crime rates are already
high, especially in Karachi, rural Sindh, and Hyderabad. Sectarian violence is common, particularly in Karachi but also in
other cities such as Quetta. Punjab province is subject to sporadic unrest and bombings, while tribal people regularly
stage attacks in Baluchistan and Sindh provinces over land and mineral wealth rights. Foreign firms can face extortion and
kidnapping. See-sawing relations with India pose latent but serious external risks. A peace process between the two
nuclear-armed countries is currently on hold.
Executive Summary: Key Facts and Demographics
Pakistan - Key Facts

Area sq 778720
km
Capital Islamabad
Languages Punjabi 48%, Sindhi 12%, Siraiki (a Punjabi

variant) 10%, Pashtu 8%, Urdu (official) 8%,
Balochi 3%, Hindko 2%, Brahui 1%, English
(official and lingua franca of Pakistani elite and
most government min
Ethnic Punjabi, Sindhi, Pashtun (Pathan), Baloch,

Diversity Muhajir (immigrants from India and their
descendants)
Religions Muslim 97% (Sunni 77%, Shi'a 20%),

Christian, Hindu, and other 3%
Currency 1 Pakistani rupee = 100 paisa
Dialling 92
Code
Population and Health Indicators
2002 2003 2004 2005 2006 2007 2008
Total Population (mil.) 155.2 158.7 162.2 165.8 169.5 173.2 177.0
Population Growth (%) 2.32 2.26 2.22 2.21 2.20 2.19 2.18
Population, Ages 0-14 Years (mil.) 62.36 62.86 63.36 63.92 64.55 65.23 65.98
Population, 65 Years and Over (mil.) 5.75 5.92 6.11 6.32 6.54 6.79 7.04
Crude Birth Rate (per 1,000 people) 31.9 31.5 31.2 30.9 30.6 30.4 30.1
Crude Death Rate (per 1,000 people) 7.7 7.5 7.4 7.3 7.2 7.0 6.9
Life Expectancy at Birth (years) 64.6 64.9 65.2 65.6 65.9 66.2 66.5
Urban Population (mil.) 52.46 54.18 55.97 57.83 59.78 61.80 63.90
Rural Population (mil.) 102.74 104.51 106.25 107.98 109.69 111.38 113.05
Income Share Held By Lowest 20% 9.4 .. .. 9.1 .. .. ..
Income Share Held By Second 20% 13.0 .. .. 12.8 .. .. ..
Income Share Held By Third 20% 16.4 .. .. 16.3 .. .. ..
Income Share Held by Fourth 20% 21.2 .. .. 21.3 .. .. ..
Income Share Held by Highest 20% 40.1 .. .. 40.5 .. .. ..
Prevalence of Undernourishment (% of population) 24.0 .. .. .. .. 26.0 ..
Health Expenditure, Public (% of GDP) .. 0.7 0.7 0.7 0.8 0.8 ..
Health Expenditure, Private (% of GDP) .. 2.3 2.2 2.1 1.9 1.9 ..

Source: IHS Global Insight, World Bank: World Development Indicators
Country Risk Summary
Nature of Risk Rating Summary
Political: Risks 4.25 Pakistan suffers a fundamental lack of stability. Politically, the country has see-sawed
between democracy and military rule throughout its history. Currently, it is under weak
civilian rule, headed by the populist Pakistan People's Party (PPP). The federal government
is fragile, faces mounting opposition from the country's other main party, the Pakistan Muslim
League-Nawaz (PML-N), and potentially from former president Pervez Musharraf's new
political party, the All Pakistan Muslim League. It is generally overwhelmed by the country's
myriad problems. Among these are: massive economic and socio-economic implications of
the worst floods in history in summer 2010; massive security problems due to widespread
militancy, especially in the Northwest; major economic instability; poor international relations,
particularly with neighbours, India and Afghanistan; and natural resource shortages. More
broadly, Pakistan has a history of institutional weakness, poor governance and corruption.
There is great concern over the lack of accountability of Pakistan's intelligence agencies to
the federal government. Furthermore, there are huge discrepancies in terms of economic
and social opportunities between Pakistan's four provinces, as well as the Federally
Administered Tribal Areas (FATA) that have sparked social unrest throughout the country. In
Baluchistan, there is an ongoing insurgency against the federal government over federal
resource allocations that have been inadequately addressed by successive governments.
Economic: Risks 4.00 While Pakistan's economy has shown signs of recovery in recent months and numerous
steps were taken toward the macroeconomic stability within the framework of the
International Monetary Fund (IMF)'s stabilization program agreed upon in November 2008,
numerous risks continue weighing on Pakistan's outlook. The effect of devastating floods that
struck the country in summer 2010 on its macroeconomic environment and external
accounts is currently of a major concern. It is estimated that direct output losses, particularly
in agriculture and textiles manufacturing, as well as indirect effects on the wider economy will
hamper real growth in the near term and weigh on Pakistan's economic development over
many years to come. Inflationary pressures will build up further on a temporary supply shock.
The fiscal deficit will widen despite the government's efforts to keep it below the IMF's
threshold. Growing expenditure, now reinforced by rehabilitation and reconstruction needs,
will increase the financing requirement. The exposure of the balance of payments will be
reinforced by the risks to the current account. Recent gains on the trade balance are more
than likely to be lost as exports moderate on lower production levels, while substantial capital
investment accelerates import growth. The sustainability of the balance of payments,
however, is likely to be supported in the near term by an expected increase foreign aid and
remittances. In the medium term, fiscal and external imbalances are likely to remain, while
structural bottlenecks, high corruption levels, and challenging security will act as additional
constraints to growth. On the positive side, the effects of the IMF macroeconomic
consolidation program and ongoing reforms in the energy sector and tax administration
should ensure a more sustainable and balanced growth over the long term.
Legal: Risks 3.75 Neglect, corruption and a general lack of funding have produced a number of problems for
Pakistan's legal system. Difficulties include long delays, the lack of a centralised
co-ordinating body to develop policy, a lack of professional management and a shortage of
judges, inadequate infrastructure, and meagre public access to justice. These factors have
been exacerbated by a decline in the standard of legal education and professional
standards, and sometimes undue political influence on the judiciary. Some changes have
been made, but overall the legal system needs extensive development. It is widely
mistrusted, partly for its slowness, but largely because it is seen to be corrupt and a tool of
the administration. The legal system is not perceived as intrinsically anti-foreign, but its
apparent inability to respond quickly makes it an inherent obstacle to business. Significant
problems remain unaddressed, although the system has potential for reform. Positive moves
have been made by the Supreme Court in 2009 that generally aim at strengthening the rule
of law, including declaring the November 2007 state of emergency and laws passed during
this period as unconstitutional and invalid, and the rescinding of a controversial graft
amnesty.
Tax: Risks 3.50 Pakistan's tax system is underdeveloped and is not conducive to carrying out business with
any ease. It suffers from one of the world's lowest tax-to-GDP ratios, a narrow tax base in
which only certain sections of society are taxed, tax evasion due to weak audit and
enforcement procedures, and lack of transparency. There have been moves by the Pakistani
authorities to improve the system, and slow progress is being made, particularly since tax
reforms are part of the conditions that the IMF set in return for the disbursal of a massive
bailout package in November 2008. As part of the tax reforms the government aims to
introduce a single-rate value-added tax (VAT) to replace the multiplicity of rates of the
current general sales tax (GST) system, although the implementation has been repeatedly
delayed. It is now envisaged to become effective from 1 November 2010.
Operational: 4.00 The Pakistani government is actively encouraging foreign investment, but faces formidable
Risks challenges in its attempts to improve the operational environment. Corruption remains
endemic at all levels and officials often demand kickbacks. Bureaucracy is slow and
obstructive, and the infrastructure—particularly in the transport sector—falls well short of
desirable standards. Inconsistent policy implementation also poses problems. The
government's anti-corruption and privatisation drive has slowed down significantly amid
severe political and security instabilities, which has left numerous sectors, such as power,
agriculture, and financial services in dire need of reform.
Security: Risks 4.50 Pakistan's domestic security situation is extremely complex. The massive military campaign
of the Pakistani Army against Islamic militants in the northwest of the country has brought
about a de-territorialisation of conflict, meaning that the danger of terrorist attacks, especially
against Western targets, is very high throughout Pakistan. In addition to the presence of
al-Qaida and reformed remnants of the Taliban regime along with their fresh Pakistani
recruits, a number of Islamic extremist groups operate in the country. The massive floods of
July and August 2010 have caused considerable socio-economic hardship to millions of
people, and the perceived inadequate response of the government has increased the risk of
militants stepping in to the void, while social unrest and crime are likely to increase. Crime
rates are already high, especially in Karachi, rural Sindh, and Hyderabad. Sectarian violence
is common, particularly in Karachi but also in other cities such as Quetta. Punjab province is
subject to sporadic unrest and bombings, while tribal people regularly stage attacks in
Baluchistan and Sindh provinces over land and mineral wealth rights. Foreign firms can face
extortion and kidnapping. See-sawing relations with India pose latent but serious external
risks. A peace process between the two nuclear-armed countries is currently on hold.
Overall 4.01 Pakistan suffers a fundamental lack of stability. Politically, the country
VERY HIGH has see-sawed between democracy and military rule throughout its
history. Currently, it is under weak civilian rule, headed by the populist
Pakistan People's Party (PPP). The federal government is fragile, faces
mounting opposition from the country's other main party, the Pakistan
Muslim League-Nawaz (PML-N), and generally is overwhelmed by the
country's myriad problems. Among these are: massive security
problems due to widespread militancy, especially in the Northwest;
major economic instability; poor international relations, particularly
with neighbours, India and Afghanistan; and natural resource
shortages. More broadly, Pakistan has a history of institutional
weakness, poor governance and corruption. There is great concern over
the lack of accountability of Pakistan's intelligence agencies to the
federal government. Furthermore, there are huge discrepancies in terms
of economic and social opportunities between Pakistan's four provinces,
as well as the Federally Administered Tribal Areas (FATA) that have
sparked social unrest throughout the country. In Baluchistan, there is
an ongoing insurgency against the federal government over federal
resource allocations that have been inadequately addressed by
successive governments. On the economic front, Pakistan continues to
face sizeable difficulties. While the influx of petro-dollars and the
government’s welcoming attitude to foreign investment boosted FDI
initially, Pakistan remains an extremely difficult country in operational
terms. The country's infrastructure requires significant development,
and while the tax and legal systems are being reformed slowly, much
more work needs to be done and there are questions over the judiciary’s
strength and training. Pakistan's security situation is deteriorating, and
risks for investors are extreme.
Comparative Historical Risk
Risk Change History
Pakistan
Pol Eco Leg Tax Ope Sec

Overall Risk Date Changed Risk Change Article
25% 25% 15% 15% 10% 10%
1 3.88 HIGH 01-Nov-98 - 4.00 4.00 4.00 3.50 4.00 3.50
2 4.11 VERY HIGH 13-Oct-99 View article 4.50 4.00 4.00 3.50 4.00 4.50
3 3.93 HIGH 16-Nov-99 View article 4.00 4.00 4.00 3.50 4.00 4.00
4 3.81 HIGH 15-Aug-01 View article 3.50 4.00 4.00 3.50 4.00 4.00
5 3.86 HIGH 13-Sep-01 View article 3.50 4.00 4.00 3.50 4.00 4.50
6 3.98 HIGH 17-Sep-01 View article 4.00 4.00 4.00 3.50 4.00 4.50
7 3.77 HIGH 24-Apr-03 View article 3.75 3.75 3.75 3.50 3.75 4.25
9 3.67 HIGH 25-Jan-06 View article 3.75 3.50 3.50 3.50 3.75 4.25
10 3.61 HIGH 12-May-06 View article 3.75 3.25 3.50 3.50 3.75 4.25
11 3.53 HIGH 26-Jul-06 View article 3.75 3.00 3.50 3.50 3.50 4.25
12 3.60 HIGH 11-Oct-07 View article 4.00 3.00 3.50 3.50 3.50 4.25
13 3.74 HIGH 05-Nov-07 View article 4.25 3.00 3.75 3.50 3.50 4.50
14 3.67 HIGH 17-Dec-07 View article 4.00 3.00 3.75 3.50 3.50 4.50
18 3.94 HIGH 03-Mar-09 View article 4.25 3.75 4.00 3.50 3.50 4.50
19 3.99 HIGH 31-Mar-09 View article 4.25 4.00 3.75 3.50 3.75 4.50
20 3.95 HIGH 30-Jun-09 View article 4.25 4.00 3.50 3.50 3.75 4.50
22 4.01 VERY HIGH 01-Oct-10 View article 4.25 4.00 3.75 3.50 4.00 4.50
Pakistan - Key Facts

Area sq 778720
km
Capital Islamabad
Languages Punjabi 48%, Sindhi 12%, Siraiki (a Punjabi variant) 10%, Pashtu 8%, Urdu (official) 8%, Balochi 3%, Hindko
2%, Brahui 1%, English (official and lingua franca of Pakistani elite and most government min
Ethnic Punjabi, Sindhi, Pashtun (Pathan), Baloch, Muhajir (immigrants from India and their descendants)
Diversity
Religions Muslim 97% (Sunni 77%, Shi'a 20%), Christian, Hindu, and other 3%
Currency 1 Pakistani rupee = 100 paisa
Dialling 92
Code
Key Demographic and Socio-Economic Indicators
Population and Health Indicators
2002 2003 2004 2005 2006 2007 2008
Total Population (mil.) 155.2 158.7 162.2 165.8 169.5 173.2 177.0
Population Growth (%) 2.32 2.26 2.22 2.21 2.20 2.19 2.18
Population, 65 Years and Over (mil.) 5.75 5.92 6.11 6.32 6.54 6.79 7.04
Crude Birth Rate (per 1,000 people) 31.9 31.5 31.2 30.9 30.6 30.4 30.1
Crude Death Rate (per 1,000 people) 7.7 7.5 7.4 7.3 7.2 7.0 6.9
Life Expectancy at Birth (years) 64.6 64.9 65.2 65.6 65.9 66.2 66.5
Urban Population (mil.) 52.46 54.18 55.97 57.83 59.78 61.80 63.90
Rural Population (mil.) 102.74 104.51 106.25 107.98 109.69 111.38 113.05
Income Share Held By Lowest 20% 9.4 .. .. 9.1 .. .. ..
Income Share Held By Second 20% 13.0 .. .. 12.8 .. .. ..
Income Share Held By Third 20% 16.4 .. .. 16.3 .. .. ..
Income Share Held by Fourth 20% 21.2 .. .. 21.3 .. .. ..
Income Share Held by Highest 20% 40.1 .. .. 40.5 .. .. ..
Prevalence of Undernourishment (% of population) 24.0 .. .. .. .. 26.0 ..
Health Expenditure, Public (% of GDP) .. 0.7 0.7 0.7 0.8 0.8 ..
Health Expenditure, Private (% of GDP) .. 2.3 2.2 2.1 1.9 1.9 ..

Source: IHS Global Insight, World Bank: World Development Indicators

Summary Macro-Economic Indicators
Summary Macro-Economic Indicators
2004 2005 2006 2007 2008 2009 2010
Real GDP (% change) 7.4 7.7 6.2 5.7 2.0 3.6 4.3
Nominal GDP (US$ bil.) 96.8 109.2 126.5 142.8 146.1 156.5 172.8
Nominal GDP Per Capita (US$) 597 659 746 825 825 866 935
Consumer Price Index (% change) 7.4 9.1 7.9 7.6 20.3 13.6 14.0
Wholesale-Producer Price Index (% change) 8.4 8.7 8.5 8.2 25.3 7.3 20.0
Policy Interest Rate (%) 7.50 9.00 9.50 10.00 15.00 12.50 13.50
Short-term Interest Rate (%) 2.49 7.18 8.54 8.99 11.37 12.52 12.37
Broad Money Supply (LCU bil.) 2,731.0 3,182.5 3,647.0 4,357.7 4,649.0 5,313.6 5,836.1
Unemployment Rate (%) 7.7 7.6 7.5 5.3 5.2 7.8 7.9
Current Account Balance (US$ bil.) -0.8 -3.6 -6.7 -8.3 -15.7 -8.4 -3.7
Current Account Balance (% of GDP) -0.8 -3.3 -5.3 -5.8 -10.7 -5.3 -2.1
Trade Balance (US$ bil.) -3.4 -6.3 -9.6 -10.6 -17.0 -13.5 -11.5
Trade Balance (% of GDP) -3.5 -5.8 -7.6 -7.4 -11.6 -8.6 -6.7
Exchange Rate (LCU/US$, end of period) 59.12 59.83 60.92 61.22 79.10 84.26 86.49
Exchange Rate (LCU/Euro, end of period) 80.53 70.58 80.23 90.12 110.09 121.38 114.16

Political: Risks
Pakistan suffers a fundamental lack of stability. Politically, the country has see-sawed between democracy and military
rule throughout its history. Currently, it is under weak civilian rule, headed by the populist Pakistan People's Party (PPP).
The federal government is fragile, faces mounting opposition from the country's other main party, the Pakistan Muslim
League-Nawaz (PML-N), and potentially from former president Pervez Musharraf's new political party, the All Pakistan
Muslim League. It is generally overwhelmed by the country's myriad problems. Among these are: massive economic and
socio-economic implications of the worst floods in history in summer 2010; massive security problems due to widespread
militancy, especially in the Northwest; major economic instability; poor international relations, particularly with neighbours,
India and Afghanistan; and natural resource shortages. More broadly, Pakistan has a history of institutional weakness,
poor governance and corruption. There is great concern over the lack of accountability of Pakistan's intelligence agencies
to the federal government. Furthermore, there are huge discrepancies in terms of economic and social opportunities
between Pakistan's four provinces, as well as the Federally Administered Tribal Areas (FATA) that have sparked social
unrest throughout the country. In Baluchistan, there is an ongoing insurgency against the federal government over federal
resource allocations that have been inadequately addressed by successive governments.
Executive Summary: Political Outlook
Possible Political Fall-Out After Devastating Floods: The worst monsoon floods in its history hit Pakistan in late
June 2010, claiming the lives of 1,600 people and leaving one-fifth of the country under water. Socio-economic
distress and hardship in the aftermath of the flood bears the possibility of a wider political fall-out in the short and
medium term. While so far there has only been sporadic unrest, it can be expected that this will grow in scale and
intensity in line with soaring food inflation and scarcity, and unemployment. The fact that the government has been
criticised by flood victims for providing inadequate support also raises fears that militants could take advantage of
the situation.
Parliament Passes Major Constitutional Amendments: Pakistan's lower house of parliament on 18 April
unanimously passed the landmark 18th amendment to the constitution of 1973 that is aimed at strengthening the
precarious state of democracy in the country. The amendments strip the country's president of many of his powers,
rendering him a ceremonial figurehead and transferring most executive power to parliament. In particular, this
includes the president's powers to dismiss the prime minister, to dissolve parliament and to appoint the country's
army chief. However, it is unclear whether this measure will provide for a greater degree of political stability.
Heavy Reliance on External Aid Hampers the Government's Credibility Domestically: The international
community has in the past expressed concerns over the sustainability of the Pakistani government's wavering
policy towards militants, which has permitted militants to consolidate their position and escalate attacks in
neighbouring Afghanistan. As a measure to push the Pakistani government to strengthen its drive against
extremism, the United States has passed two massive aid bills. However, U.S. aid to Pakistan has not been
uncontentious, given that the tough restrictions on military aid to Pakistan have sparked tensions between the
United States and Pakistan, and within Pakistan between the civilian government and the military. Pakistan has
bitterly complained that the conditions constitute an attack on its sovereignty, a notion that sits unwell in a country
in which large parts of the population share anti-U.S. sentiments.
Outlook: Long-Term
Pakistan's political outlook for the medium and long term remains volatile. The improved relationship with the international
community, especially with the United States, is likely to persevere in the near-to-medium term, following the recognition
by U.S. policy that the fates of Pakistan, Afghanistan and the United States are shared. However, this support should not
divert attention from the myriad problems the government faces domestically, including transition to a fully-fledged
democracy, resolving a range of constitutional issues that govern the relationship between the intelligence services
vis-a-vis the government, endemic corruption and resolving the country's extremely fragile economic situation. This,
coupled with the potentially severe consequences that huge numbers of internally displaced persons (IDPs) from combat
areas will have on social and economic stability, is unlikely to give the government much chance to breathe in the near
future. Furthermore, relations with India are set to remain poor, with a resolution of the Kashmir crisis—crucial to
improving relations over the long-term—not in sight.
Resolving socio-economic hardships will be another long-term issue in Pakistan, not least given that the lack of social and
economic opportunities is thought to be main factor that breeds "an ethos of terrorism". If the country has any hope of
addressing this issue, the government must embrace reform of the semi-feudal economic system, which bars much of
Pakistan's population from meaningful participation in the economy and keeps them impoverished.
Institutions and Players: Origins

Pakistan had troubled political beginnings, giving a foretaste of the problems that would emerge in the decades that
followed Partition in 1947. Within a year, the nation's founder, Quaid-i-Azam Mohammad Ali Jinnah, had died, prompting
confusion during this critical stage of Pakistan's political development. It took until 1956 for the first constitution to be
agreed, producing a unique set-up whereby the country was created as a unitary Muslim nation with a unicameral
legislature, which in turn had equal representation for the East and West "wings" in the assembly. In practice, this
two-nation theory was unworkable, because it failed to take into account the different religions, ethnicities and even
languages of the people that lived within the two "wings". By 1962, the country had adopted its second constitution, in
which political parties were banned and representation was won through local-elected "vote banks". The loss of what was
to become Bangladesh in 1971 gave rise to a third Pakistani constitution in 1973. This envisaged Pakistan as a
democratic Islamic republic with constitutional guarantees for individual freedoms, including those of speech and
assembly. Musharraf amended this constitution in August 2002, with a document known as the Legal Framework Order
(LFO). Parliament finally passed a revised version of these changes in December 2003, cementing a raft of changes. The
most notable of these saw an increased role in politics for the military, through the creation of civilian-military National
Security Council (NSC). These changes were reversed in April 2010 through the passing of the so-called 18th
amendment, which returned much of the president's sweeping powers to parliament.
Institutions and Players: Structure

Head of State
The president is head of state and as per the 18th amendment of the constitution that was passed in April 2010 has a
largely ceremonial function. With the amendment, the president no longer has the authority to dissolve parliament, dismiss
the prime minister, as well as to appoint provincial governors, the chairman of the election commission and the attorney
general. The president is elected for a five-year term by a college composed of members of the National and Provincial
Assemblies and the Senate. The Constitution requires that the president be a Muslim.
Government
The Islamic Republic of Pakistan is a parliamentary democracy based on universal adult suffrage for those over 21 years
of age. The legislature (Majlis-e-Shoora) is bicameral, consisting of a 217-member directly elected National Assembly and
a 100-member Senate elected by the provincial legislatures. The prime minister is the head of government and together
with the cabinet exercises executive authority. The leader of the majority party—or majority coalition—is usually elected
prime minister by the National Assembly, following legislative elections.
Parliament
Parliament consists of two Houses, the Senate and the National Assembly. The National Assembly has a five-year term
and a total of 342 seats, of which 272 are elected through universal adult suffrage. Seats are allocated as follows: 148 to
the Punjab, 61 to Sindh, 35 to Khyber Pakhtunkhwa (renamed in 2010 from North-West Frontier Province) and 14 to
Baluchistan. In addition, the Federally Administered Tribal Areas of the north-west (FATA) have 12 seats, and the Federal
Capital District of Islamabad has 2, with 10 additional seats reserved for religious minorities and 60 seats for women. The
senate currently consists of 100 members, elected by the provincial legislatures; senators are elected for a six-year term.
One-third of the members stand for election every two years.
Regional Administration
As per the constitution, each of the provinces of Pakistan is directly governed by Provincial Assemblies. The Provincial
Assemblies consist of both general seats and seats reserved for non-Muslims as well as for women. In total, Baluchistan’s
Provincial Assembly has a total of 65 seats (51 general, 11 for women, 3 for non-Muslims), Khyber-Pakhtunkhwa 124 (99
general, 22 for women, and 3 for non-Muslims), Punjab 371 (297 general, 66 for women, 8 for non-Muslims) and Sindh
168 (130 general, 29 for women, and 9 for non-Muslims). Elections for Provincial Assemblies are held directly and every
five years unless dissolved earlier. As per the 18th amendment of the constitution, Chief Ministers and no longer
governors exercise executive authority. The Provincial Assemblies elect the upper chamber (the Senate). Each of the four
provinces has 19 senators, 8 senators are appointed from the FATA and 3 are from the Federal Capital area.
Judiciary
The constitution provides for an independent judiciary but in reality, the institution is heavily politicised. The system itself
includes the Supreme Court, provincial high courts, Shariat courts and other lesser courts, exercising civil and criminal
jurisdiction. As per the 18th amendment of the constitution, a seven-member judicial commission that is headed by the
chief justice will appoint Supreme Court judges. The Federal Shariat Court consists of eight Muslim judges, including a
chief justice, who is again appointed by the president. The Shariat Court considers whether any law is offensive to the
injunctions of Islam; the president or provincial governor is tasked with taking steps to address the situation where there is
a problem. A further feature of the judicial system is the office of Wafaqi Mohtasib (Ombudsman), which is provided for in
the constitution. This institution is designed to bridge the gap between administrator and citizen, in order to improve
administrative processes and procedures and help curb the misuse of discretionary powers. With the 18th amendment of
the constitution the judiciary is no longer empowered to validate the suspension of the constitution.
Institutions and Players: Major Parties
Pakistan Peoples Party (PPP): The PPP currently holds power at the federal level. One of the two main civilian
parties, it is also referred to as the Pakistan Peoples Party Parliamentarians (PPPP), as the latter was formed in
2002 to comply with electoral laws. It was led by former prime minister Benazir Bhutto until her assassination in
December 2007 and was created by her father, Zulfikar Ali Bhutto, in 1967. It is currently co-chaired by Bhutto’s
son, Bilawal and Bhutto’s husband, Asif Ali Zardari, although in reality Zardari exerts control. It retains considerable
grassroots support among the rural masses across Pakistan, and particularly in Bhutto's home province of Sindh.
Pakistan Muslim League – Nawaz (PML-N): The leading party in the ruling coalition prior to the October 1999
coup, and now the main opposition party. The PML-N is led by former prime minister Nawaz Sharif, who returned
from exile in November 2007. Unlike Bhutto, there was no sense that Sharif would pursue a deal with Musharraf
and in the event he didn't, instead pressing for his removal. Although the PML-N joined the government following
the 2008 polls, it later withdrew as a result of serious policy differences. It has used the period since Sharif's return
from exile to rebuild its support base and is vying to take power at the federal level in the next election, particularly
now that the Supreme Court has overturned a ban against him and his brother from holding political office. The
PML-N was at the forefront in pressing the PPP to reinstate the judges of the Supreme Court in early 2009. The
PML is the oldest of Pakistan’s parties and celebrated its centenary in 2006. Originally named the Muslim League,
it was instrumental in setting Pakistan on the road to independence, and was headed by the country’s founding
father, Mohammed Ali Jinnah.
Pakistan Muslim League-Quaid-e-Azam (PML-Q): The party was the leading member of the ruling coalition
before Pakistan's return to democracy in 2008 and was regarded as a vehicle of Musharraf. Following a heavy
election loss in the 2008 polls, the party has been seeking to rebuild itself, careful not to ally with either of the main
parties in its attempts to forge an independent stance.
Muttahida Qaumi Movement (MQM): The MQM was formed in the 1980s out of a Karachi-based 1970s student
organisation that aimed to quash discrimination against Muhajirs (ethnic Urdu-speaking Muslims who migrated
from India to Pakistan after Independence). The political party proved popular not just with Muhajirs but with other
immigrants, and consequently secured strong backing in the melting pot of Karachi. Following a period of violence
during the 1980s, the party has worked hard in recent years to shed this element of its past, while also broadening
its appeal. Overall, the party remains very much an urban Sindh phenomenon, restricting it from gaining power on
a broader scale. However, it played an important part in aid and reconstruction work following the October 2005
earthquake, which boosted its national standing.
All Pakistan Muslim League (APML): The new party of former president and army chief Pervez Musharraf, which
was established in London on 1 October 2010. The APML is expected to contest the 2013 parliamentary election.
Institutions and Players: Key Figures

President, Asif Ali Zardari is the son of the Pakistani industrialist Hakim Ali Zardari, head of the Zardari tribe and
Co-Chair of husband of the late Benazir Bhutto. He served in the National Assembly and as environmental minister
Pakistan during the second term of his wife's premiership. He was kept in custody from 1997 to 2004 on charges
Peoples Party of corruption which earned him the name "Mr 10 Per Cent", and on murder allegations relating to the
(PPP) - Asif Ali death of his brother-in-law, Murtaza Bhutto, in 1996. He returned with his wife Benazir Bhutto to
Zardari Pakistan in October 2007 after the granting of an amnesty, the National Reconciliation Ordinance (NRO).
He was appointed as co-chairman of the Pakistan Peoples Party (PPP) following the assassination of his
wife in December 2007 and elected president of Pakistan in September 2008 following the resignation of
Musharraf a month earlier. With the NRO having lapsed on 28 November 2009 and declared
unconstitutional by the Supreme Court on 16 December 2009, calls are increasing for him to resign from
office and face up to the corruption charges.
Prime Minister - Yousuf Raza Gilani was appointed prime minister in March 2008 by Pakistan's democratically elected
Yousuf Raza parliament, which is led by secular parties, after being nominated by the Pakistan Peoples Party (PPP).
Gilani He served as a parliamentary speaker under Benazir Bhutto during her second term as prime minister
from 1993 to 1996 and as a minister for health and housing during her first term between 1988 and
1990. He was also imprisoned for five years during President Pervez Musharraf's rule, after facing
corruption charges relating to granting 350 government jobs without following the correct procedures
and the excessive use of telephones and cars during his tenure as speaker. The charges, which the PPP
says were politically motivated, were dropped by Musharraf under an amnesty known as the National
Reconciliation Order, which was issued in October 2007. Gilani has roots in Pakistan's political heartland
of Punjab province and a close relationship with Zardari, although signs of strain between the two men
began to emerge in early 2009.
Ex-Prime Nawaz Sharif comes from a family of Punjabi industrialists, with close ties to the business community.
Minister, leader Despite his lack of personal charisma, Sharif built up a significant political power-base, particularly in
of Pakistan Punjab, acceding to power in 1997. On 12 October 1999, the military coup relieved Sharif of his powers
Muslim League and he was subsequently imprisoned for life on charges of hijacking and terrorism in April 2000, with an
(Nawaz) - Mian additional 14-year sentence imposed in July 2000 for corruption. After pledges from the Saudi royal
Nawaz Sharif family, Sharif was allowed to go into exile in Saudi Arabia, with a tacit accord reportedly stipulating that
he abstain from political activities. He returned to Pakistan in November 2007. Although a Supreme
Court order of January 2009 currently bars him from contesting elections, his powerful showing during a
stand-off between his PML-N and the ruling PPP in March 2009 over the reinstatement of sacked judges
of the Supreme Court suggests that he aims to play a decisive role in the next election. He is currently
at the forefront of demanding President Zardari to step down after a graft amnesty was declared
unconstitutional in December 2009.
Army Chief – Ashfaq Parvez Kayani was appointed as general and chief of army staff on 28 November 2007 after
General Ashfaq Pervez Musharraf stepped down as army chief in order to be sworn in for his second term as president.
Parvez Kayani Kayani is former director of Pakistan's Inter-Services Intelligence and director general of military
operations. Prior to this, he served as corps commander in Rawalpindi. He served as deputy military
secretary during Benazir Bhutto's first term as prime minister and is believed to have mediated a
potential power-sharing arrangement between Musharraf and Bhutto in 2007. His term was extended by
a further three years in July 2010.
Former Pervez Musharraf is a former army commando and artillery officer who took over as the 12th chief of
President, Chief the country's powerful army in October 1998, following the resignation of General Jahangir Karamat.
Executive and While a distinguished military officer, his appointment in 1998 came as a surprise. Musharraf belongs to
Army Chief - the group of Mohajirs—immigrants to Pakistan from India after independence, who form a minority
Pervez among the bureaucracy and the army. Given that he superseded longer-serving officers and that he was
Musharraf a virtual political unknown prior to the coup, his rise to power could not be expected. His power base is
cemented by the widespread loyalty of the 500,000-strong army, although popular discontent with
Musharraf and the administration has grown as his tenure has progressed. This has most visibly been
witnessed in the number of assassination attempts made on his life in recent years. After mounting
opposition to his rule following the ousting of former Chief Justice Iftikhar Muhammad Chaudhry in
March 2007, Musharraf stepped down as army chief, after being re-elected for a second five-year term
as president—his first as a civilian—in November 2007. Impeachment proceedings began against him in
August 2008, culminating in his resignation later in the month. Pakistan's Supreme Court in August
2009 ruled the ousting of the judiciary as unconstitutional, spurring speculation that Musharraf may face
trial should he choose to return to Pakistan from his current hometown of London. He has nevertheless
voiced his intention to return to the political scene in Pakistan, following the creation of his own political
party, the All Pakistan Muslim League, which is expected to contest in the 2013 general election.
Leader of Hakimullah Mehsud heads the militant Taliban's umbrella organisation TTP, which was officially
Tehrik-e-Taliban formed in December 2007 and had gained effective authority over most of FATA and some NWFP areas
Pakistan (TTP) by May 2009. The Pakistani military is currently undertaking massive operations to flush out the
– Hakimullah advance of TTP militants.
Mehsud
Policies and Stability: Elections and Government Changes

Election Barometer
The next parliamentary election is due to be held in February 2013, to be followed by a presidential election in September
the same year.
Recent Elections
September 2008 Presidential Election: Presidential elections were held following the resignation of President
Pervez Musharraf in August 2008. Asif Ali Zardari secured more than two-thirds of the votes in a secret ballot of a
702-member electoral college comprising a joint session of the country’s 342-seat National Assembly (lower
house), 100-seat Senate (upper house), and four provincial assemblies, with each accounting for 65 votes. The
vote was a three-way race between Zardari, former Supreme Court Chief Justice Zaman Siddiqui, who was
backed by the Pakistan Muslim League-Nawaz (PML-N) and Mushahid Hussain, who was supported by the
Pakistan Muslim League-Quaid-e-Azam (PML-Q). Zardari’s victory was assured by his PPP-led coalition having a
majority in both the national assembly and senate and two of the four provincial assemblies with support from the
Muttahida Qaumi Movement (MQM), the Awami National Party (ANP), the Jamiat Ulema-e-Islam-Fazl (JUI-F), the
PML "forward bloc", a breakaway faction of the pro-Musharraf PML-Q, and independents and Baluch nationalist
parties.
February 2008 General Election: Despite militant attacks February 2008 Election Results

and allegations of electoral manipulation, the election was
Party Seats
generally regarded as fair and transparent by observers.
Voter turnout was reported at over 45%, which is similar to Pakistan Peoples Party 120
parliamentary elections in 2002 and 1997. The PPP
Pakistan Muslim League-Nawaz 90
performed strongly throughout the country and did
especially well in Sindh province, fuelled by a sympathy Pakistan Muslim League-Quaid-e-Azam 51
vote generated by the assassination of Benazir Bhutto on Muttahidda Qaumi Movement 25
27 December 2007. Meanwhile, the PML-N had a strong
Muttahida Majlis-e-Amal 6
showing in its stronghold of Punjab province, fuelled by
opposition to the government’s decision to storm the Red Awami National Party 13
Mosque (Lal Masjid) in Islamabad in July 2007. Others 27
Sub-national secular parties such as the ANP performed
strongly in the north-western tribal areas, weakening support for the Islamist MMA alliance. Finally, the poor state
of the economy—with rising inflation and food, fuel and power shortages—lay behind the poor performance of the
PML-Q throughout the country.
October 2007 Presidential Election: The absence of exiled opposition politicians Nawaz Sharif and Benazir
Bhutto meant that Musharraf had virtually no competition in the 2007 Presidential election, and he expectedly won
with an overwhelming majority. Although Sharif tried to contest the election, he was turned back into exile at the
airport. Musharraf received 671 votes, while Wajihuddin Ahmed, a former judge with the Supreme Court who was
opposed to Musharraf, received only eight. Six votes were rendered invalid. The election was ultimately boycotted
by the opposition, and 80 members of Parliament resigned.
Policies and Stability: Government Stability

Following decades of see-sawing between democracy and military rule, Pakistan has been a multiparty democracy since
February 2008. However, the government is extremely unstable, and has been flatly unable to address the country's
myriad problems. The government has attempted to strengthen political stability by transferring most of the president's
overarching executive powers to parliament as per the 18th amendment to the constitution that was signed into law on 19
April 2010, but given the immaturity of the democratic system this could backfire, particularly if parliament fails to address
the country's myriad problems.
A further, related source of instability stems from the Supreme Court's landmark decision in December 2009 to declare as
unconstitutional and invalid an amnesty law (the National Reconciliation Ordinance, NRO) that protected thousands of
individuals from sweeping corruption lawsuits. On 11 October 2010 the Supreme Court rejected the government’s
requests to delay this further, suggesting that decisions that will affect the fate of a number of senior politicians and
officials, including President Asif Zardari, will be made soon. In doing so, the court is walking a tightrope between ensuring
more respect for the country's constitution and therefore strengthened democracy, and political turmoil.
The fact that the government continues to struggle to cope with the scale of the worst floods in Pakistan's history also
clearly bears the possibility of a wider political fall-out in the short and medium term. While so far there has only been
sporadic unrest, it can be expected that this will grow in scale and intensity in line with soaring food inflation and scarcity,
socio-economic distress and unemployment. However, while anti-government sentiments already ran high before the
floods, and while many Pakistanis expressed anger at President Asif Ali Zardari's trip to Europe during the crisis, so far
anti-government moves have been limited to local levels. However, that should not suggest that the situation will remain
quiet. The opposition, most importantly the PML-N, is a force to be reckoned with, not least because it could take
advantage of rising anti-government sentiment, particularly in the southern Sindh province which has been worst affected
by the floods and which is the power base of the ruling PPP. However, so far at least the PML-N has refrained from
making strong anti-government statements, and appears to be waiting for a more opportune moment, perhaps the general
election scheduled for 2013. Currently, the PML-N is clearly wary of pushing political instability to a point that it might not
be able to control, which could in turn provide incentives for the military to intervene.
Ahead of the 2013 election, anti-government sentiments can also be expected to be stoked by the All Pakistan Muslim
League, a new party that was established on 1 October 2010 by former president and army chief Pervez Musharraf.
More broadly, there is great concern over the lack of accountability of Pakistan's intelligence agencies to the federal
government, which was once more highlighted in a UN inquiry into the 2007 assassination of former Prime Minister
Benazir Bhutto. With the government indicating that it could commence a new probe into the assassination, this would
manoeuvre the government into a direct collision course with the country's still-strong military and intelligence services.
Although the military has over the past years shown little propensity to intervene in the political process of the country,
there are no guarantees that it will not do so in the future if it deems the government an unviable actor.
Policies and Stability: Government Programme and Key Themes

Tackling Islamic Extremism
Currently, tackling the issue of Islamist militancy tops the government’s agenda. Although until recently militancy occurred
mainly along the Pakistan-Afghanistan border, it has spread with militant groups now controlling almost all parts of FATA
(Federally Administered Tribal Areas) as well as large parts of Khyber Pakhtunkhwa (renamed in April 2010 from
North-West Frontier Province).
The civilian administration under Asif Ali Zardari appears to be taking a more decisive stance against extremists, although
policy formulations did not follow a clear line from the time the PPP took office. Initial reluctance to address the problem at
all was followed by a peace deal between extremist clerics in Swat that was aimed at subjecting Swat valley to Sharia law
in return for the group giving up arms. With the extremists simply using the opportunity to extend their reach, manifested in
increasingly bold, high-profile terror attacks, pressure grew on the government to take up more decisive measures. In
particular, international pressure mounted after the U.S. administration acknowledged the link between the surge of
Islamic extremism in Pakistan and the strengthening Taliban movement in Afghanistan. With massive military operations
under way in parts of Khyber Pakhtunkhwa and FATA, the government now seems intent to clamp down on extremism,
particularly given substantive pressure and massive aid packages from the United States. However, the means by which it
intends to do so are questionable and have arguably caused a dispersal rather than defeat of militants on the one hand,
and a humanitarian crisis on the other. Both consequences have fuelled the spread of disenfranchisement from the state
in affected areas rather than dispel it. Given the government's slow response in the worst floods in 80 years in Khyber
Pakhtunkhwa in August 2010, there are now fears that militants could take advantage of the situation and gain more
control over the area.
"Baluchistan Package"
There are a number of insurgent groups in Baluchistan, most of which have come into being to fight unequal resource
allocation between federal units, as benefits received by Baluchistan in no respect match its rich resource base. While
there have been a number of attempts to address the situation, the "Baluchistan package" that was presented before
parliament on 24 November 2009 addresses the root causes of conflict in an unprecedented way. Key issues addressed
by the 39-point-package include the acknowledgement "that the question of provincial autonomy needs to be revisited and
the ownership of the provinces over their resources reasserted in the constitution" and the determination "to correct the
wrongs of history, by conferring the political, economic and cultural rights of the provinces". Specific proposals comprise
far-reaching constitutional, political, administrative and economic measures. These are positive developments, and
much-needed ones given that the Baluch insurgency adds a further layer of instability at a time in which the government is
waging unprecedented military offensives against militants in the north-west of the country (see above). It remains to be
seen, however, how the Baluchistan package will be implemented and to what extent these efforts will bear fruit. So far,
the government's initiative has received widespread support, including from the main opposition party Pakistan Muslim
League-Nawaz (PML-N); however, a few Baluch MPs indicated that these proposals did not yet go far enough. The
Baluchistan package remains unimplemented as of October 2010.
Anti-Corruption Efforts
The military government launched a drive to eradicate corruption and recover revenue lost through the entrenched culture
of graft and cronyism. The campaign has continued under the current civilian government but produced few tangible
results. Apart from the adoption of the National Anti-Corruption Strategy (NACS) and the National Accountability
Ordinance (2002), the National Accountability Bureau (NAB) was established in 2002 to co-ordinate the campaign.
Alongside tackling straightforward embezzlement, the NAB has tried to target the large-scale problem of loan default.
More than 200 families from the commercial and land-owning elite owe 70% of defaulted loans, estimated to cost the
banking sector US$4 billion to US$6.6 billion per annum. Strong political connections protected families from prosecution
under the Sharif and Bhutto administrations and the problem has continued. Both former prime ministers themselves have
been charged with large-scale corruption. Beyond these opposition leaders, few other high-profile figures have been
brought to justice. Instead, attention has been concentrated at the lower levels, with the aim of firming up the bureaucracy
and implementing stronger legislative procedure to counter the problem although little real progress has been recorded.
The period in which Musharraf has been in office has been notable for a lack of scandals but, at the same time, there has
been little evidence of counter-corruption legislation being tightened. One exception came in April 2004, when Pakistan
ratified the UN's Convention Against Corruption. The Holder of Public Office (Accountability) Act proposed in early 2009
has been attacked by Transparency International as being vaguely formulated, and resembling the National Reconciliation
Ordinance (NRO), which freed leading politicians of corruption charges.
Over the course of 2009 the Supreme Court has been at the forefront of tackling corruption. On 16 December 2009 it
declared the NRO as unconstitutional. President Asif Ali Zardari, one of more than 8,000 beneficiaries of the NRO,
currently remains unaffected by this decision due to his presidential immunity. However, the fact that the NRO technically
allowed him to contest the country's elections in the first place means that his eligibility for presidency could be challenged.
Political and Socio-Economic Reforms
Pakistan needs to overcome a number of issues if it is to address its fundamental problem of perennial instability. A few
thousand elite families have long dominated Pakistan's political and commercial environments in a system more akin to
feudalism, despite the country's "democratic" credentials. The landlords who control the votes of the largely illiterate rural
population have amassed political power and concentrated legislative strength in the National Assembly, in order to
propagate conservative economics and retrograde social policy. Landlord power is part of an unholy trinity, partnered by
the military and the once colonially-trained bureaucratic class in a mutually reinforcing nexus of power. The preservation of
this status quo has prevented the emergence of the dynamic middle class that has spearheaded rapid economic
development across Asia, and has also ensured that the intellectual elite continues to be removed from power, further
hampering political development.
The 1999 military coup was staged on the twin claims of dragging the economy from its stagnation and introducing clean
accountable government. Tackling the triumvirate's power remains essential to the realisation of these aims. Initially,
political reform under the Musharraf regime was targeted expressly at the ruling establishment, which has governed
Pakistan since independence. However, after October 2002's elections, the campaign's focus became lost under the
civilian leadership—many of whom hail from the establishment against which the reforms were targeted. Similarly,
Musharraf became more preoccupied with other policy, particularly external relations. Beyond this, Musharraf’s intention to
maintain a tight hold on power became more apparent as his tenure progressed, and he abandoned his original agenda
for the sake of retaining his authority. The parliamentary election in February 2008 saw the return of many of the traditional
elites, including Nawaz Sharif and the Bhutto family, led by the husband of the late Benazir Bhutto, Asif Ali Zardari.
Policies and Stability: Opposition Prospects and Programme

Following the marginalisation of religious parties in the February 2008 general election, the two major secular parties in
the political arena are the Pakistan People's Party (PPP) and the Pakistan Muslim League–Nawaz (PML-N). While both
formed a coalition government after the election, the PML-N went into opposition following the resistance within the PPP to
reinstate the judges of the Supreme Court that were sacked by Musharraf. In early 2009, the PML-N, under the leadership
of former Prime Minister Nawaz Sharif, successfully challenged the PPP to reinstate the judges. The PML-N has time and
again shown that it is a force to be reckoned with, capitalising on its powerbase in the powerful Sindh province. It can be
expected that the party will cash in on any failures of the PPP in the next election, and currently the PML-N is upping its
pressure on Zardari to resign and face up to corruption charges that are likely to be revived after an amnesty that
protected Zardari from these charges was declared unconstitutional by Pakistan's Supreme Court on 16 December 2009.
There are other parties that have played an important role in Pakistani politics, such as the Pakistan Muslim
League–Quaid-e-Azam (PML-Q) and the Muttahida Qaumi Movement (MQM). However, considering the extremely
fractured and fluid political landscape in Pakistan, speculation as to the prospects of any specific political party is futile.
This is also true with regard to the All Pakistan Muslim League, a new party that was established on 1 October 2010 by
former president and army chief Pervez Musharraf.
External Relations: Key Relationships and Issues

Bilateral
Afghanistan
Relations between Afghanistan and Pakistan have historically been difficult despite far-reaching cultural and
linguistic ties between a number of groups, especially among Pashtuns, across the border. In fact, much of the two
countries' bilateral relations have been overshadowed by attempts at mutual destabilisation and interference. Much
of the relations between the two countries was determined by activities of the United States and the Soviet Union
during the Cold War, and most of the frictions that exist between Afghanistan and Pakistan are remnants of this
period. Today, these issues include the problems of growing Islamic extremism, Pashtun nationalism and the
disputed status of the Durand line between the two countries.
China
Pakistan has traditionally been able to rely on China for regional support, and the Communist giant has become its
largest supplier of arms since 1990. However, the rapidly changing international picture has seen China attempt to
realign itself and its relations. Seeking to become the pre-eminent regional player, China has settled on
maintaining good relations with both Pakistan and India, and has used this positioning to its own benefit when it
pressured both sides to show restraint during 2002's military stand-off. The growing importance of China's relations
with India has become apparent. Although Pakistan publicly made light of the situation, the administration is likely
to be deeply concerned that it cannot fully count on support from its most significant long-time ally. That said,
support continues to be forthcoming, and China tends to raise the rhetoric of its “all-weather” relationship with
Pakistan during periods of friction with India. Notably, China has voiced support for Pakistan’s nuclear programme
in response to the U.S.-India Nuclear Agreement, and also supported Pakistan’s observer status at the Shanghai
Cooperation Organisation (SCO) while being less enthusiastic about admitting India in 2005. China has also
invested in a number of major infrastructure projects in Pakistan, notably the Gwadar port and in upgrading the
Trans-Karakoram Highway linking the two countries. In return, Pakistan supported China’s observer status in the
South Asian Association for Regional Cooperation (SAARC) in 2005, to the quiet consternation of India.
India
Pakistan's relations with India are dominated by competing claims on the state of Jammu and Kashmir, which has
a large Muslim majority. The unresolved Kashmir conflict constitutes one of the world's most dangerous trouble
spots and historically there has been a latent risk that fully-fledged war could erupt between the two nuclear-armed
neighbours. In 2002, Kashmir attracted attention once again when India and Pakistan came close to war following
several terrorist attacks in Kashmir and India, for which New Delhi blamed Pakistani groups. A peace process
between India and Pakistan that was initiated in 2004 was put on ice indefinitely following the November 2008
Mumbai attacks. Since then, several meetings have failed to foster an understanding between the two sides over
confidence-building measures to bring the peace process back on track. The latest meeting that ended fruitlessly
was held on 15 July 2010. India maintains that any renewed efforts at peace talks would depend on Pakistan's
successes in dismantling its domestic extremist networks.
Russia
Pakistan's relations with Russia have long been frosty, but there are signs of improvement. The two countries
inhabited opposing camps during the Cold War; during the 1980s Pakistan, with U.S. backing, trained and armed
Afghan Mujahidin fighters against Soviet forces. Following this, during the 1990s, Pakistan's support for the Islamic
extremist Taliban regime in Afghanistan angered Russia. However, Musharraf has attempted to temper this
traditional animosity, and in December 2003 he made the first visit by a Pakistani leader to Russia in more than 20
years. A number of accords were signed as a result of the visit, although none were particularly ground-breaking.
These moves have continued, albeit haltingly. In April 2007, Russia’s Prime Minister Mikhail Fradkov visited
Pakistan, the first such visit by a Russian PM in almost 40 years. Following talks with his then-Pakistani
counterpart, Shaukat Aziz, Fradkov vowed to broaden the areas of co-operation between the two nations. It is in
Pakistan's strategic interests to cultivate better relations with Russia, a country from which it could buy arms and
subsequently reduce its dependence on the United States. Furthermore, improved relations between the two
would also partly counterbalance Russia's traditionally strong relationship with India.
United States
U.S.-Pakistan relations are traditionally fraught with tension, although the fact that Pakistan figures prominently in
the United States' Af-Pak strategy against extremism as well as Pakistan's aid dependency means that there are
lively interchanges. Pakistan was of strategic importance to the United States during the Cold War,
counter-balancing Soviet influence, primarily in Afghanistan. Relations with the United States cooled following the
withdrawal of the Soviet Union from Afghanistan in 1989, with the United States becoming increasingly focused on
Pakistan's nuclear programme. The situation registered a significant downturn when Pakistan undertook nuclear
tests in 1998; the United States registered its disapproval through widespread sanctions. Relations deteriorated
further the following year, when Musharraf took power in a military coup. Increasingly, Pakistan came to be
regarded as a rogue state, largely ostracised from the international community. The authorities sought to capitalise
on the situation following the 11 September 2001 terrorist attacks on the United States, deciding to support the
subsequent U.S.-led war on terror in return for closer ties to Washington—at India's expense. Other benefits
included a better standing in the international community, donor aid and debt write-offs. The U.S. government
granted Pakistan the status of “major non-NATO ally” in 2004, which upgraded military co-operation between both
states. Today, the global fight against extremism continues to dominate the U.S.-Pakistani relationship, and since
the trilateral Af-Pak Summit in Washington in May 2009 relations were warming considerably due to Pakistan’s
unprecedented and decisive clampdown on extremism in massive military operations. Relations experienced a
further boost during the two countries' strategic dialogue in March 2010, with both sides promising a new chapter
of co-operation and partnership. Despite this frictions continue over a number of issues, including the U.S. use of
drones to attack Islamic extremists along the Afghanistan-Pakistan border. Pakistan has openly condemned these
attacks as infringing on Pakistan's sovereignty, a well-considered move that resonates well within the Pakistani
populace that has largely taken a pronounced anti-American stance. Tensions have also emerged over conditions
imposed on two massive military and civilian aid bills that the United States has passed for Pakistan, in particular
between the weak civilian government and the military.
Regional Blocs/International Organisations
South Asian Association for Regional Co-operation (SAARC)

All the South Asian countries are members of SAARC, which was formed in 1985. It was set up along similar lines to its
South-East Asian counterpart, the Association of Southeast Asian Nations (ASEAN), and hopes were high that collective
co-operation would bring greater levels of growth and prosperity to the poorly developed region, as well as provide the
basis for a regional security grouping. Pakistan's poor relations with India have undermined SAARC's effectiveness and
this, together with other nations' fears of Indian dominance, has meant that policies have been repeatedly frustrated. That
said, an improvement in relations between India and Pakistan has allowed some progress to be made, particularly on the
issue of promoting free trade between SAARC members.
External Relations: Trade Agreements
SAARC
In 1991, SAARC established the South Asian Preferential Trading Arrangement (SAPTA), the ultimate goal of
which was to achieve a regional free trade area. SAPTA came into operation in 1995, after which negotiations
were held in an unsuccessful attempt to reduce preferential tariffs. Fearing that a continuation of the policy would
effectively make little difference to regional trading arrangements, the more radical option of the South Asian Free
Trade Agreement (SAFTA) was proposed. The framework for this was agreed during the twelfth SAARC summit in
January 2004, with its implementation beginning in phases from 1 January 2006. It is envisaged that the free trade
area will be operational by 2016, although progress remains a challenge, not least because of traditional tensions
and fears over the different levels of development within the group. This has already resulted in the creation of a
two-tier system, with the more and less developed nations reducing tariffs within five and eight years respectively.
Pakistan became a member of the World Trade Organization (WTO) in 1995. It is also a member of the
Commonwealth of Nations, the Organisation of the Islamic Conference, and an observer at the Shanghai
Cooperation Organisation (SCO).
Economic: Risks
While Pakistan's economy has shown signs of recovery in recent months and numerous steps were taken toward the
macroeconomic stability within the framework of the International Monetary Fund (IMF)'s stabilization program agreed
upon in November 2008, numerous risks continue weighing on Pakistan's outlook. The effect of devastating floods that
struck the country in summer 2010 on its macroeconomic environment and external accounts is currently of a major
concern. It is estimated that direct output losses, particularly in agriculture and textiles manufacturing, as well as indirect
effects on the wider economy will hamper real growth in the near term and weigh on Pakistan's economic development
over many years to come. Inflationary pressures will build up further on a temporary supply shock. The fiscal deficit will
widen despite the government's efforts to keep it below the IMF's threshold. Growing expenditure, now reinforced by
rehabilitation and reconstruction needs, will increase the financing requirement. The exposure of the balance of payments
will be reinforced by the risks to the current account. Recent gains on the trade balance are more than likely to be lost as
exports moderate on lower production levels, while substantial capital investment accelerates import growth. The
sustainability of the balance of payments, however, is likely to be supported in the near term by an expected increase
foreign aid and remittances. In the medium term, fiscal and external imbalances are likely to remain, while structural
bottlenecks, high corruption levels, and challenging security will act as additional constraints to growth. On the positive
side, the effects of the IMF macroeconomic consolidation program and ongoing reforms in the energy sector and tax
administration should ensure a more sustainable and balanced growth over the long term.
Economic: Key Indicators and Forecasts

Detailed Macro-Economic Indicators
2006 2007 2008 2009 2010 2011 2012 2013 2014
Real GDP (% change) 6.2 5.7 2.0 3.6 4.3 2.5 6.3 4.6 4.7
Nominal GDP Per Capita (PPP$) 2,942 3,132 3,195 3,269 3,368 3,426 3,615 3,761 3,925
Real Consumer Spending (% change) 1.0 4.7 -1.3 11.3 3.9 7.6 9.3 6.0 0.3
Real Fixed Capital Formation (% change) 19.9 13.6 3.8 -11.3 -2.0 4.8 6.0 4.8 4.2
Real Government Consumption (% change) 48.3 -9.6 39.0 -31.5 13.4 23.9 7.9 7.2 4.7
Real Imports of Goods and Services (%
18.7 -3.5 3.6 -15.2 11.2 23.5 14.9 9.6 9.8
change)
Real Exports of Goods and Services (%
9.9 2.3 -5.3 -3.3 14.1 -0.9 8.2 10.4 5.5
change)
Industrial Production Index (% change) 11.2 5.2 -0.2 -5.3 4.1 2.9 6.7 5.3 4.6
Wholesale-Producer Price Index (%
8.5 8.2 25.3 7.3 20.0 18.2 10.0 7.0 9.5
change)
Policy Interest Rate (%) 9.50 10.00 15.00 12.50 13.50 13.00 12.00 11.00 10.92
Short-term Interest Rate (%) 8.54 8.99 11.37 12.52 12.37 10.38 9.12 9.65 9.52
Long-term Interest Rate (%) 8.47 9.50 11.66 12.63 12.37 11.14 9.82 11.30 11.13
Population (mil.) 169.47 173.18 176.95 180.81 184.75 188.79 192.92 197.10 201.31
Population (% change) 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.1
Unemployment Rate (%) 7.5 5.3 5.2 7.8 7.9 8.1 8.2 8.3 8.5
Current Account Balance (US$ bil.) -6.7 -8.3 -15.7 -8.4 -3.7 -6.2 -6.2 -6.1 -6.8
Current Account Balance (% of GDP) -5.3 -5.8 -10.7 -5.3 -2.1 -3.2 -2.9 -2.9 -3.0
Trade Balance (US$ bil.) -9.6 -10.6 -17.0 -13.5 -11.5 -17.8 -20.9 -21.8 -20.7
Trade Balance (% of GDP) -7.6 -7.4 -11.6 -8.6 -6.7 -9.1 -9.9 -10.2 -9.1
BOP Exports of Goods US$bn 17.0 18.2 21.2 19.8 21.7 22.8 24.8 28.3 31.3
BOP Imports of Goods US$bn 26.7 28.8 38.2 33.3 33.2 40.6 45.7 50.2 52.0
Exchange Rate (LCU/Yen, end of period) 0.51 0.55 0.87 0.91 1.05 1.04 1.16 1.19 1.30
Exchange Rate (LCU/Euro, end of period) 80.23 90.12 110.09 121.38 114.16 108.18 128.71 134.55 149.31
Debt Indicators
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Foreign Exchange Earnings (US$ bil.) 23.4 25.7 27.9 32.5 33.0 35.9 39.3 42.4 46.5 50.6
Portfolio Investment, Net (US$ bil.) 0.9 2.0 2.1 -0.3 0.8 0.9 0.9 0.9 0.9 1.0
Portfolio Investment, Net (% of GDP) 0.8 1.6 1.5 -0.2 0.5 0.5 0.5 0.4 0.4 0.4
Foreign Direct Investment, Net (US$ bil.) 2.2 4.2 5.5 5.4 3.7 2.2 2.9 3.3 3.7 4.3
Foreign Direct Investment, Net (% of GDP) 2.0 3.3 3.8 3.5 2.4 1.3 1.5 1.6 1.6 1.8
Foreign Exchange Reserves, Excl. Gold (US$
10.0 11.5 14.0 7.2 11.3 12.4 12.5 11.6 12.7 13.9
bil.)
Import Cover (Months) 4.1 3.9 4.5 1.8 3.4 3.8 3.3 2.8 2.8 2.9
Total External Debt (US$ bil.) 33.2 36.0 40.7 49.3 57.3 59.1 61.7 62.8 65.4 68.2
Total External Debt (% of GDP) 30.4 28.5 28.5 32.3 36.6 34.3 31.9 30.2 29.0 28.0
Total External Debt (% of forex earnings) 141.8 140.2 145.8 151.8 173.8 164.6 157.1 148.0 140.5 135.0
Short Term External Debt (US$ bil.) 1.2 1.3 2.2 1.4 1.7 3.3 3.1 3.3 3.6 4.0
Short Term External Debt (% of total external
3.7 3.7 5.5 2.8 3.0 5.5 5.0 5.2 5.5 5.8
debt)
Short Term External Debt (% of international
12.3 11.5 15.9 19.4 15.0 26.2 24.7 28.5 28.5 28.4
reserves)
Total External Debt Service (US$ bil.) 2.4 2.3 2.6 2.9 4.3 4.0 4.1 4.2 4.4 4.7
Interest Payment Arrears (US$ bil.) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
External Liquidity Gap (% of forex earnings) 15.3 22.7 27.8 50.9 30.2 18.1 22.2 21.2 20.1 20.8
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated
live from quarterly Sovereign Risk forecast bank (SRS).
Executive Summary: Economic Outlook
Growth will be hampered by severe flooding. We have revised our September forecast for Pakistan in line with
the latest available estimates for the flood damage that struck the country in late July 2010. While substantial
losses of wheat stock are likely to result in the revision of real growth for fiscal year (FY) 2010 (ended 30 June),
which has been preliminary estimated at 4.3%, a major correction to real growth will take place during FY2011.
The changes to the near-term outlook consist of the downward adjustments on the supply side and some possible
upward adjustments on the demand side. Major supply setbacks stem from direct losses in agriculture and
manufacturing, as well as indirect effects of the lost capital stock on the industrial production. On the other hand,
aggregate supply may see a boost in the near term, supported by reconstruction-related consumption and
investment. Overall, real growth is likely to be a couple percentage points below our previous projection and
average about 2% in FY2011.
Difficult fiscal stance will remain a major challenge to the recovery. The new FY2011 budget revealed in June
2010 has targeted a deficit of 4% of GDP—in line with the limits agreed on with the International Monetary Fund
(IMF). While some of the budget projections already seemed to be overoptimistic, including a 19% increase in
tax-revenue collection, the flood has made the current fiscal-deficit target unachievable. A large fiscal gap will be
partially financed by donors, but the government's domestic borrowing from the banking system is also likely to
increase, intensifying the risk of crowding out the private-sector credit that would circumscribe growth and create
additional pressure on the future debt-sustainability framework. Timely introduction of the value-added tax and
elimination of power subsidies also remains under question, suggesting that the fiscal reforms will experience new
pitfalls.
The US$11.3-billion IMF loan program will be fully realized but might need a follow-up. Despite Pakistan's
evident inability to meet the fiscal and macroeconomic targets, the IMF has committed to continue its financing to
Pakistan under the US$11.3- billion stand-by arrangement agreed upon in November 2008. In addition, in
response to the flood, the IMF will provide US$450 million in immediate assistance. New performance targets for
the sixth tranche of the loan of US$1.6 billion will be discussed later this year. As the program is due to be
completed by the end of 2010, it is also likely that Pakistan will go into another IMF program that will take into
account post-immediate financing needs incurred by the flood.
Outlook and Assumptions: Domestic Assumptions
International aid, even with minor delays, will continue to flow into Pakistan as international relations, especially
with the United States, remain benign. Foreign aid and remittances will be especially buoyant in the near term,
channeled towards flood rehabilitation. Official transfer inflows, however, will decelerate with time, leaving
Pakistan's balance of payments more self-dependent.
Reform measures proscribed by the International Monetary Fund loan facility, including complete elimination of
electricity subsidies and higher tax collection, will experience delays amid challenging macroeconomic
environment following the flood .
The current political environment might be complicated by further deterioration in government relations with the
opposition, domestic security issues, or military elite intervention.
Pakistan will continue to cooperate with the U.S. anti-terrorism campaign. No significant military conflict with India
occurs.
Global oil prices gradually recover as world growth resumes.
Outlook and Assumptions: Alternative Scenarios
A continuous increase in the scale of the war against the Taliban and/or any severe deterioration in the security
environment or development of a power vacuum and spiraling violence could seriously affect forecasts across the
board.
Taliban attacks on members of the international aid community, including the World Bank and the United Nations,
force the latter to withdraw their operations from the conflict areas, leaving the government alone in dealing with
the internally displaced persons and destroyed infrastructure, potentially causing fiscal drawbacks and outbreak of
social discontent.
Depositor confidence deteriorates and compromises the financial- and banking-sector performance, exerting fresh
pressure on external liquidity.
Any serious outbreak of violence or fighting with India over the Kashmir issue or any upsurge of additional
anti-Western sentiment in the country could disrupt economic activity.
International donors fail to provide envisaged foreign assistance funding, compromising domestic market liquidity
and creating additional obstacles to growth.
Economic Growth: Outlook

Substantial flood-related output losses will hamper near-term growth. Our September growth outlook for fiscal year
(FY) 2011 (started 1July) has been substantially revised downwards to reflect latest available estimates of the flood
damage, with an estimated cost of reconstruction reaching up to US$45 billion. Agriculture and manufacturing—together
accounting for almost 40% of GDP—will be hit the hardest. Agricultural losses are estimated at around US$3 billion, with
16% of total cultivated land damaged and 15% of total livestock lost. Textiles manufacturing, mostly supplied by domestic
cotton production, is likely to suffer from rising input costs, as almost 15% of Pakistan's cotton output for the year is lost
and will have to be imported. Industrial production will also feel the pinch, hampered by substantial losses to the capital
stock, power generation, and transportation infrastructure.
Reconstruction efforts might provide some support to growth on the demand side. Losses to the aggregate supply
on real GDP will be partially offset by increasing aggregate demand. Reconstruction efforts will boost investment, although
the effect of it is likely to be seen in the second half of the fiscal year, as the first months after the disaster will be devoted
to the damage assessment. Private consumption will experience both negative and positive dynamics. Lost income and
high inflation will circumscribe household spending. On the other hand, consumption will receive support from the rise in
remittances sent to the affected Pakistanis from their relatives abroad and the use of savings. Combined, increased
investment and consumption will partly compensate for smaller net exports on the aggregate demand and somewhat
mitigate the supply-side shocks to growth. Our latest pre-flood forecast assumed a 4.3% real GDP growth for FY2011.
Considering the balance of all forces, the effects of the flood may shave off a couple of percentage points from the initial
FY2011 real growth projection.
Structural shortcomings will hamper medium-term growth. The International Monetary Fund program highlights the
array of structural problems that continue to hamper sustained economic development and a reduction in pervasive
poverty rates. Infrastructure shortcomings and lack of skilled labor constitute a major deterrent to sustainable
medium-term growth. Unreliable transport and telecommunication networks, as well as the agonizing power sector are in
desperate need of reforms. Endemic corruption, a slow and opaque bureaucracy, a weak legal framework, and
inconsistent policy implementation continue to thwart investment activity.
Economic Growth Indicators
2007 2008 2009 2010 2011 2012 2013 2014
Real GDP (% change) 5.7 2.0 3.6 4.3 2.5 6.3 4.6 4.7
Real Consumer Spending (% change) 4.7 -1.3 11.3 3.9 7.6 9.3 6.0 0.3
Real Government Consumption (% change) -9.6 39.0 -31.5 13.4 23.9 7.9 7.2 4.7
Real Fixed Capital Formation (% change) 13.6 3.8 -11.3 -2.0 4.8 6.0 4.8 4.2
Real Exports of Goods and Services (% change) 2.3 -5.3 -3.3 14.1 -0.9 8.2 10.4 5.5
Real Imports of Goods and Services (% change) -3.5 3.6 -15.2 11.2 23.5 14.9 9.6 9.8
Nominal GDP (US$ bil.) 142.8 146.1 156.5 172.8 195.0 210.3 212.9 226.8
Nominal GDP Per Capita (US$) 825 825 866 935 1,033 1,090 1,080 1,127

Economic Growth: Recent Developments

Improved manufacturing performance has given impetus to growth in fiscal year (FY) 2010. Above-target
performance of the manufacturing sector, driven by an increase in domestic demand, particularly for durable goods and
construction materials, set the tone for recovery. The real economy gathered pace from the second quarter of FY2010
(fiscal year runs 1July–31 June) onward. The agricultural sector will grow at 2% annually, supported by a buoyant harvest
collected in December 2009. It is worth noting, however, that substantial losses to the carryover wheat stock due to the
summer 2010 flood will be mostly attributed to the last quarter of FY2010, suggesting possible downward revision to the
growth figure. External trade activity improved in the second half of FY2010, with both exports and imports returning to
positive growth. Favorable monetary policy and improvement in total deposits of the banking system supported a pickup in
private-sector credit. On the other hand, inflationary pressures returned on the back of rising international commodity
prices and a domestic hike in power tariffs..
Economic growth had been weak in FY2009, hit by internal imbalances and external shocks. Pakistan's economy,
rescued from the balance-of-payments crisis by the International Monetary Fund (IMF) in November 2008, had grown only
3.7% in real terms (market price basis) in FY2009 (ended June 2009) compared with the previous year's 6.0%. The
anemic growth reflected the adverse effects of the country's macroeconomic imbalances, combined with the external
shocks of the global downturn. Restricted by conditions of the IMF's macroeconomic stabilization program, the country had
to balance fiscal and monetary consolidation on one side and countercyclical stimulus spending on the other. Monetary
easing, required to stimulate demand, was limited by the skyrocketing inflation. Unforeseen increases in defense and relief
expenditures amid the government's offensive against the Taliban aggravated the fiscal position and sucked resources
from public investment, resulting in a decline of its share in GDP for the first time in seven years. Private investment,
circumscribed by tight credit conditions, uncertainty over deteriorating security, and undermined business confidence, also
recorded a decline, with the net foreign investment falling more than 50% year-on-year (y/y). Manufacturing, suffering from
severe power shortages, high production costs, low labor productivity, and other structural bottlenecks, had contracted
5.7% in FY2009. On the other hand, favorable weather conditions and government support to the sector resulted in
bumper crops and the overall agricultural growth of 4.3%—which was 3.3% higher than a year earlier. Net exports also
improved, as the decline in imports was steeper than in exports, narrowing the trade deficit 23.4% y/y.
Growth sustainability had been in question before the global downturn. Hampered by severe macroeconomic
mismanagement, structural bottlenecks, and a deteriorating security and political environment, growth slowed in
FY2007/08. Macroeconomic imbalances became increasingly apparent as inflation surged and the trade balance was
forced into deep deficit by surging imports. Imports were further inflated by the spiral in global commodity prices. Extensive
subsidy systems failed to support an adjustment to higher global prices and exerted further pressure on the budget
balance as the difference between administered and market prices widened. Concerns over the worsening political and
economic outlooks fueled capital outflows, prompting sharp reversals in the value of the rupee exchange rate and equity
values. Risk perception intensified abruptly following the escalation of the global financial crisis from mid-September 2008
onwards. After Pakistan failed to secure sufficient financing support from multilateral and bilateral donors, it appealed for
emergency IMF financing support in early November 2008. A 23-month, US$7.6-billion loan package was agreed to in
return for Pakistan's commitment to a structural reform program aimed at redressing macroeconomic imbalances. In
August 2009, the loan was augmented to US$11.3 billion in recognition of Pakistan's increased balance-of-payments
needs.
Inflation: Outlook
Inflation will be fuelled by temporary supply shock, particularly for food items. Our inflation outlook worsened since
the last forecast, with consumer price inflation now projected to average 14.0% in calendar year 2010 and accelerate to an
average of 17% in 2011. Inflationary pressures that have been building up prior to the flood will be profoundly accentuated
by a widening gap between supply and demand. Lost physical capital and shortages of food and energy will come as a
supply shock, while destroyed transportation and distribution channels will make it more expensive for goods to circulate.
As the agriculture was affected the most, the risks are high that the food inflation will become a major policy concern.
Concurrently, demand for skilled labor, construction materials, and other reconstruction-related goods and services will
rise, driving wages and prices up. On the other hand, the monetary-policy tightening to circumscribe inflation will be hardly
possible due to fragile economic recovery and high social costs. Supply shock of this kind is usually short-lived, but if the
deadline for a new sowing season for wheat—Pakistan's staple crop—is missed, the next harvest due in the spring of
2011 might be lost also, significantly undermining food security and fuelling inflation. Our base scenario now expects
consumer price inflation to gradually accelerate throughout the next three quarters, picking up in the third quarter of 2011.
Inflationary pressures are likely to ease by the last quarter of 2011.
Inflation Indicators
2007 2008 2009 2010 2011 2012 2013 2014
Consumer Price Index (% change) 7.6 20.3 13.6 14.0 12.6 8.3 6.7 7.5
Wholesale-Producer Price Index (% change) 8.2 25.3 7.3 20.0 18.2 10.0 7.0 9.5

Inflation: Recent Developments
Inflation has become a concern in the last few months. After an easing trend seen in the first quarter of 2010,
inflationary pressures intensified in recent months. The consumer price index (CPI) reading in April showed a 13.3%
year-on-year (y/y) growth, reflecting an administrative price adjustment in communication/telephone charges by the
Pakistan Telecommunication Authority. Meanwhile, the underlying macroeconomic factors pointed out the reasons for the
buildup of inflationary pressures. While a slight recovery in growth in the first half of 2010 suggested an uptick in domestic
demand, the aggregate supply remained weak owing to persistent energy shortages and a rampant security situation.
Inflation was also triggered by the domestic energy price adjustments implemented in line with the International Monetary
Fund (IMF) macroeconomic stabilization program requirements. Finally, with the first effects of the flood having already
kicked in, August inflation showed a new uptick, with the CPI rising 13.23% y/y and the wholesale price index up 19.22%
y/y.
Significant progress had been made in reducing inflation in 2009. The sharp reduction of inflation from the average of
20.3% in 2008 to 13.6% in 2009 was a result of a combination of high base effects on record-high commodity prices in
2008, monetary and fiscal consolidation by the Pakistani authorities backed by the IMF's macroeconomic stabilization
plan, a slump in consumer demand amid the economic crisis, and buoyant agricultural output that relieved pressures on
food supply. Inflationary pressures gradually abated throughout the second and third quarters of 2009, bottoming out in
October with a single-digit year-on-year growth. Nevertheless, the fourth quarter of the year recorded a rebound in inflation
on the back of the holy month of Ramadan-related food price increases and an electricity tariff hike in October.
Depreciation in the rupee exchange rate kept inflationary pressures from the import side. Although some of these factors
were temporary, structural supply-side bottlenecks as well as the fiscal stance have also contributed to the recent rise in
inflation.
Exchange Rates: Outlook

The exchange rate will be supported by large foreign inflows. While the trade balance is likely to deteriorate in the
wake of the flood damage, limiting foreign-currency earnings, the foreign-exchange reserves are likely to receive a boost
from the alternative foreign capital flows in the near term. Increase in the private and official transfers in the form of
remittances, bilateral aid, and foreign grants can be expected in the first 12–18 months following the flood. As the relief
and reconstruction operations use local resources, the hard currency will be converted into Pakistani rupees, potentially
leading to a temporary real effective exchange-rate appreciation in the second half of 2011. Nonetheless, the nominal
exchange rate is likely to continue depreciating as domestic inflation remains elevated. As the "financing gain" from the
foreign aid dries up, the currency might experience a more pronounced depreciation in the medium term. With that in
mind, the rupee is on course to weaken 4.6% in 2010, strengthening to an expected 2.8% depreciation in 2011 and
showing an expected depreciation of 5.3% in 2012, while remaining highly susceptible to volatility.
Exchange Rate Indicators
2007 2008 2009 2010 2011 2012 2013 2014
Exchange Rate (LCU/US$, end of period) 61.22 79.10 84.26 86.49 86.55 99.01 100.41 106.65
Exchange Rate (LCU/US$, period avg) 60.74 70.41 81.71 85.26 86.64 91.23 99.68 104.63
Exchange Rate (LCU/Euro, end of period) 90.12 110.09 121.38 114.16 108.18 128.71 134.55 149.31
Exchange Rate (LCU/Euro, period avg) 83.13 102.94 113.62 112.51 109.28 116.53 131.55 143.32

Exchange Rates: Recent Developments

The rupee had weakened sharply between December 2009 and February 2010 but rebounded in the last few
months. Despite a steady accumulation of the foreign reserves, supported by the International Monetary Fund (IMF)'s
US$11.3-billion loan injection, the rupee depreciated at the beginning of 2010, reflecting the central bank's decision to stop
providing liquidity support for oil payments in the inter-bank foreign-exchange market in mid-December 2009. Rises in
import prices and volume also added to the heightened demand for the U.S. dollar. The value of the rupee, however, was
restored in the last two quarters of the year, with the August end-of-month exchange rate showing an appreciating trend.
The rupee had traded within a relatively wide range in 2009, recording a double-digit depreciation. The IMF
program attached to its US$11.3-billion loan a call for greater exchange-rate flexibility, which is crucial to maintain the
reserve-accumulation targets and foster competitiveness. As a result, the central bank allowed the rupee to depreciate
substantially throughout 2009. The average rate of depreciation of the rupee against the U.S. dollar was almost 16%. By
the end of the year, however, four IMF injections from its US$11.3-billion financing package and the allocation of Special
Drawing Rights boosted foreign-exchange reserves from US$6.7 billion in November 2008 to more than US$14.0 billion in
December 2009, slowing the pace of depreciation to about 3.7% in July–January. Nevertheless, the real effective
exchange rate still recorded appreciation, reflecting the sizable inflation differential with the trading partners and offsetting
the gains on competitiveness.
Rupee depreciation had accelerated as economic imbalances mounted and political uncertainty persisted. After a
relatively stable exchange rate over fiscal year 2006/07, the rupee had lost 28.9% against the (also weakening) U.S. dollar
by end-September 2008. A substantial outflow of portfolio capital—mainly in equity markets—and strong import payments
were largely accountable for the decline. In addition, speculative activity—spurred by the concern of further exchange-rate
weakening and fears that the State Bank of Pakistan would not support the rupee’s value—resulted in a hoarding of
foreign exchange. Risk aversion intensified in the wake of the escalation of the global financial crisis from mid-September
onward that prompted a flight of capital out of high-risk, high-yield assets. Reflecting the turbulence, the currency closed
the year down 30.0% from the corresponding period of 2007, depreciating 16.0% in average annual terms.
Economic Policy: Monetary Policy and Outlook
Persistent inflation and fiscal weaknesses will keep the monetary course unsettled. Despite a pressing need to
keep the borrowing costs for the reconstruction period low, there will be no space for further monetary easing in the near
term. Inflation is likely to intensify, reflecting a temporary supply shock after the devastating floods. Rising government's
domestic debt and increased borrowing from the banking system will also have to be considered. The risk of crowding out
the private-sector credit will be reinforced with potential excess creation of the overall domestic credit, which would add to
the inflationary pressure. In such a scenario, the central bank is likely to keep the interest rates low until the end of 2010 in
order to provide support to a damaged economy. Nevertheless, the International Monetary Fund (IMF) has still advised a
cautious monetary stance in order to trammel high inflation. Aggressive monetary tightening despite the negative
ramifications for growth is one of the cornerstones of the IMF's structural-reform program. Tightening is especially
warranted as the need to adjust macroeconomic imbalances disproportionately falls on monetary policy, because of
continued fiscal overruns and the swift pass-through of exchange-rate fluctuations to domestic prices. This suggests that
the interest rates will remain rather high over the medium term, with gradual adjustments as inflation rates cool. The State
Bank of Pakistan is expected to maintain liquidity-boosting measures through adjustments in commercial-bank
reserve-requirement ratios, particularly targeting credit growth at small and medium-sized enterprises.
Monetary Policy Indicators
2007 2008 2009 2010 2011 2012 2013 2014
Policy Interest Rate (%, end of period) 10.00 15.00 12.50 13.50 13.00 12.00 11.00 10.92
Short-term Interest Rate (%, end of period) 8.99 11.37 12.52 12.37 10.38 9.12 9.65 9.52
Long-term Interest Rate (%, end of period) 9.50 11.66 12.63 12.37 11.14 9.82 11.30 11.13

Economic Policy: Monetary Policy - Recent Developments

Monetary tightening initiated following a rebound in inflation dynamics. Over the latest monetary policy review in
August, the State Bank of Pakistan (SBP) has raised the main policy rate by 50 basis points to 13%, thus ending seven
months of "on hold" policy stance during which the SBP focused on consolidating the recovery. The main reasons for the
rate increase were rising inflationary pressures as well as high liquidity growth fuelled by government's excessive
borrowing from the domestic banking system. Previously, the interest rates were lowered three times since April 2009,
when the repurchase rate was lowered by 100 basis points from its prohibitive 15% level to spur plummeting economic
activity. The underlying factors for the cuts, besides favorable inflation dynamics, included an improved external current
account, and sustained, within-target growth of broad money (M2). The real economy reacted positively to the previous
reductions, with manufacturing production staging a modest recovery in the first half of fiscal year (FY) 2010 (started July)
and with private credit growth picking up by the end of the year.
Anemic growth in FY2009 and favorable inflation dynamics had called for an easing cycle in monetary policy. As
domestic demand sharply retrenched at the beginning of 2009 and private credit contracted following the global trends, the
central bank faced the dilemma of curbing still-high domestic inflation on one side and supporting growth on the other.
With the International Monetary Fund (IMF) stabilization program in place, the monetary policy has been cautious, with the
easing stance having started later than in most regional peers. Favorable reviews from the IMF on Pakistan's compliance
with the monetary targets of the program and subsiding inflation in the first quarter of 2009 led to a 100-basis-point policy
rate cut in April from the previous prohibitive 15%. Another 100-basis-point cut followed in August 2009.
The SBP has followed a dual goal of maintaining price stability and promoting economic growth. Formerly, the
central bank favored indirect measures to adjust liquidity and credit growth as inflation began to strengthen, implementing
increases in the cash reserve requirements of domestic banks. With public debt levels being high, it remained inhibited
from aggressive hikes in the leading interest rate. As inflation surged, however, the SBP began raising the leading
discount rate with a cumulative 550-basis-point hike implemented between July 2007 and November 2008, bringing it to
15.0%.
Economic Policy: Fiscal Policy and Outlook

Flood-related spending will make it virtually impossible to meet the fiscal year (FY) 2011 fiscal-deficit target.
Pakistan's excessive fiscal gap remains the main vulnerability of its overall macroeconomic stability and
balance-of-payments position. The new FY2011 (started July 2010) budget, which was revealed in June, has targeted a
deficit of 4% of GDP—in line with the limits agreed on with the International Monetary Fund (IMF). The budget outlined a
series of critical measures, focusing on expenditure cuts and increasing domestic revenue mobilization. While some of the
budget targets already seemed to be overoptimistic, including a 19% increase in tax-revenue collection, the flood has
made the IMF's fiscal target of 4% of GDP unrealistic. Immediate humanitarian assistance to more than 8 million people in
need as well as further reconstruction and rehabilitation costs, even if partially covered by international donor assistance,
will represent a heavy claim on the government expenditure account. President Zardari has already announced that
development spending of 663.00 billion Pakistani rupees (US$7.74 billion) allocated in the new budget would be
suspended and redirected towards relief and rehabilitation. Concurrently, tax-revenue collection will be hit, as economic
activity decelerates and private-sector profits fall on incurred losses and rising costs. All in all, Pakistan faces a renewed
risk of a fiscal deficit ballooning to as high as 8% of GDP.
Fiscal gap is likely to be financed externally in the near term. The financing of the gap, if not covered by sufficient
foreign-currency transfers, will lead to an access borrowing from the domestic banking system, draining credit from the
private sector, undermining liquidity, and distorting market interest rates. It may also result in substantial increase of
domestic debt, putting additional pressure on the balance of payments. Our main scenario, however, expects that foreign
grant financing will provide adequate budgetary support in the near term.
Economic Policy: Fiscal Situation - Recent Developments

The fiscal gap has remained high while financing of the deficit has become difficult. Provisional figures for the fiscal
year (FY) 2010 fiscal deficit made it clear that the revised deficit target of 5.1% of GDP (previously 4.9%) has been
missed. Provisional tax-collection numbers came almost 4% short of the original target. Expenditure, on the other hand,
has been higher than budgeted because of the unexpected rise in security and humanitarian spending. Efforts to address
the growing energy-sector circular debt also resulted in higher expenditures. All in all, we estimate the budget shortfall to
be at around 6% of GDP. In addition, as the FY2010 budget had relied heavily on the external financing from the Friends
of Democratic Pakistan (FODP) group, the delay in foreign disbursements forced the government to borrow heavily from
domestic banking system. The limit on borrowing from the central bank for FY2010 has been missed already in the third
quarter of the fiscal year, forcing the International Monetary Fund (IMF) to waive Pakistan's performance criteria on
government domestic borrowing.
The IMF target for FY2008/09 had been missed, with the budget deficit of 5.2% of GDP. Fiscal year 2008/09 budget
data revealed a shortfall of the amount equivalent to 5.2% of GDP despite the IMF's targeted reduction in the fiscal deficit
to 4.6%. To a large extent, the budget was a non-event constrained by multiple demands. The government's offensive
against the Taliban launched in May 2009 resulted in unforeseen increases in defense and relief expenditures associated
with more than 3 million internally displaced persons. The target was also missed due to excessive spending by provinces
and revenue shortfalls, mostly caused by delayed implementation of tax reforms. Tax collection has remained very low at
around 9% of GDP. Combined with high military expenditure and interest payments, this low collection rate has led to
onerous domestic public debt levels of more than 50% of GDP.
The budget deficit had surged in FY2007/08, reflecting the lack of fiscal discipline. Reversing years of consolidation,
the budget deficit ballooned to almost 8.0% of GDP (excluding grants) in fiscal year 2007/08—far in excess of the circa
4.0% deficit averaged over the past five years. Expenditure was inflated by the rising subsidy burden, increasing
debt-service costs, and higher capital spending, while the defense portfolio remained substantial. The rise in expenditure
has not been compensated for by growth in revenue. Historically, Pakistan's revenue base has been weak, compromised
by very low tax penetration and rampant evasion. Reforms to redress this core macroeconomic weakness have been
limited. The tax-to-GDP ratio stands at just 8.8%, and the tax avoidance is high.
External Sector: Outlook

The trade deficit will widen on lower export capacity. The flood will have a sizeable effect on Pakistan's trade balance.
Lost surpluses of export-oriented agricultural output and disruption of domestic production (particularly textiles
manufacturing) will substantially lower export capacity. Nevertheless, the effect of the flood on the trade balance described
above is likely to be diluted throughout the next 18–24 months. As the flood has destroyed a substantial amount of the
capital stock, including infrastructure, initial reconstruction needs within the next several months are likely to increase
imports already in 2010. On the other hand, agricultural and textiles exports are likely to see a significant contraction only
in 2011, as the carryover stock from the last season will allow to meet the export targets in 2010. Therefore, the calendar
year trade deficits for 2010, 2011, and possibly 2012 (if the next wheat crop sowing season deadline is missed) will be
higher than predicted before, but not as dramatic as it could be if Pakistan does not have enough inventories to meet the
current year's export demand.
Rising trade deficit is likely to be offset by large transfer inflows on the current account. While the pressures from
widening trade deficit on the current account will rise, it is also expected that the deficit will be partially mitigated by the
income and transfer balances. Most likely, the flood will result in a decline of the profit remittances from foreign companies
operating in Pakistan, reducing the income-account deficit. Meanwhile, new substantial inflows of foreign aid and
increased remittances from abroad can also be expected in the next 12–18 months. Both multilateral and bilateral donors
are likely to reinforce financial assistance to Pakistan following the flood. At the moment, the UN's call for US$459 million
in urgent relief and reconstruction funds has yielded around three-quarters of this amount. In addition, the Asian
Development Bank (ADB) approved a US$3-million grant from the Asia-Pacific Disaster Response Fund (APDRF) and
extended a US$2-billion assistance package on top of the grant. It is still unclear whether the package will be given as
loans or a combination of loans and grants, but the financing is likely to be disbursed within the next two years, according
to the ADB's statement. The World Bank also responded to the catastrophe, having announced a US$1-billion loan for
Pakistan. Funds will come through reprogramming of already planned projects and reallocation of undisbursed funds.
Trade and External Accounts Indicators
2007 2008 2009 2010 2011 2012 2013 2014
Exports of Goods (US$ bil.) 18.2 21.2 19.8 21.7 22.8 24.8 28.3 31.3
Imports of Goods (US$ bil.) 28.8 38.2 33.3 33.2 40.6 45.7 50.2 52.0
Trade Balance (US$ bil.) -10.6 -17.0 -13.5 -11.5 -17.8 -20.9 -21.8 -20.7
Trade Balance (% of GDP) -7.4 -11.6 -8.6 -6.7 -9.1 -9.9 -10.2 -9.1
Current Account Balance (US$ bil.) -8.3 -15.7 -8.4 -3.7 -6.2 -6.2 -6.1 -6.8
Current Account Balance (% of GDP) -5.8 -10.7 -5.3 -2.1 -3.2 -2.9 -2.9 -3.0

External Sector: Recent Developments

A shrinking trade deficit and buoyant remittances has brought support to the current account in the fiscal year
(FY) 2010 (ended 30 June). Driven by significant contraction in imports at the beginning of the fiscal year and the
encouraging increase in exports in the last few months, the trade deficit has narrowed to US$15.3 billion from US$17.1
billion during the previous year. While the government's full-year target of US$10.7 billion has been still missed, the
smaller trade deficit provided support to the current account. Together with a surprising surge in workers' remittances of
more than 20% at the beginning of the fiscal year and with the realization of US$656 million from the Coalition Support
Fund (CSF) in May 2010, the improved trade balance led to a sharp narrowing in the current-account deficit to an
estimated US$3.5 billion, or 2% of GDP, according to the State Bank of Pakistan Nevertheless, even a smaller
current-account deficit was difficult to finance, as the net foreign investment inflows fell more than 20% in FY2010, leaving
a large financing gap on the country's balance of payments. The gap has been covered by official borrowing from the
International Monetary Fund (IMF) and other multilateral and bilateral donors, increasing the country's external debt and
debt-service requirements. According to the central bank's data, one-third of total financial inflows received in the first half
of FY2010 represents the IMF credit for budgetary support, part of which needs to be repaid in the fourth quarter of
FY2010, creating significant pressure on balance-of-payments financing.
The IMF has stepped in as private capital inflows have atrophied. As private-sector capital inflows take a hit from
political turmoil, public-sector borrowing became a crucial support for external balances. While the widening shortfall on
the current account had been offset by private capital flows until November 2007, confidence was fundamentally
undermined by political uncertainty. Foreign capital was also turned away in a quest for a safer environment in the midst of
global financial turmoil. While foreign direct investment remained relatively stable at around US$5 billion over FY2007/08,
new portfolio inflows fell from around US$3.3 billion in FY2006/07 to only US$41 million in FY2008/09 (ended June 2009).
These outflows have been mainly registered from the stock market, as falling exchange reserves have been accompanied
by fears of future exchange-rate devaluation and the imposition of capital controls. These trends continued over the first
half of FY2008/09 and were sharply exacerbated by the deterioration in the international financial environment. As deficits
on both the capital and current accounts widened, foreign-exchange reserves were depleted to near-critical levels of less
than two months of imports. After appeals to bilateral donors failed to raise sufficient financing, Pakistan appealed to the
IMF for a US$7.6-billion financing agreement to avert a near-inevitable balance-of-payments crisis. The program has been
augmented by an additional US$3.2 billion in August 2009, and it is expected to disburse funds in response to the
fulfillment of reform criteria as set out in the macroeconomic consolidation program.
Economic Structure and Context: Development and Strategy

Economic Development
Pakistan faces the problem of an underdeveloped economy that has been unable to sustain the growth rates
required to reduce the country's dire poverty. A major factor contributing to Pakistan's disappointing economic
performance is fiscal mismanagement where excessive defense spending takes priority over financing human-capital
development. Large budget deficits have led the country to become heavily dependent on foreign aid and loans.
Corruption and sectarian violence also negatively impact the economy.
Developments in politics, both internal and external, have boosted Pakistan's economy. President Pervez
Musharraf seized power in 1999, when the economy was arguably near collapse. In the 10 years from 1992 to 2002,
annual growth nearly halved to 3.3%, from the previous decade average of 6.0%, as export growth collapsed from 10.4%
per annum to 1.1%. Musharraf initiated effective reforms that increased privatization. Pakistan has also been a key ally of
the United States in its war on terror, and has received economic support from the United States in the form of aid and
debt relief. As a result, in 2002-03, real GDP growth reached 5.1%, the highest rate since 1995-96. The current-account
surplus increased sharply, foreign-exchange reserves reached record high levels, the overall fiscal deficit declined, and
inflation remained low. Export growth was the highest in over a decade.
Pakistan’s current growth performance cannot remain unqualified. After years of mismanagement, any improvement
in the economy comes from a very low base. The country's grinding poverty trap will remain unless such a profound
shakeout occurs to unlock state-directed development and private-sector enterprise. By the end of the 1980s, the
incidence of poverty had declined from 40% to 18%, but now one-third of the population live below the poverty line of
US$1 per day. Growth in per-capita income has fallen to an average of around 1% per annum, with the economy still
dominated by agriculture, save for expanding textile sectors. With benchmark literacy rates standing at just 44%
(compared with an average of 64% in similar per-capita income countries), medium-term growth will depend on huge and
sustained investment in infrastructure and human capital.
Economic Strategy
The large fiscal deficit is the main constraint on the government's ability to support poverty alleviation,
sustainable growth, and economic recovery. Austerity is mandatory, and is laid down in tight performance targets set
by the IMF. Pivotal issues include reduction of the fiscal deficit through deep cuts in defense spending, coupled with a
tightening of the numerous holes in the tax net, which facilitate mass evasion. Mechanisms to raise the poor level of
national savings and boost capital formation for investment are also vital. Meeting IMF conditions is vital to restoring the
tattered credibility of Pakistan's economic management. This is especially warranted as recurrent fiscal deficits have
bloated the government’s domestic debt. Although on a declining trend, domestic debt still accounts for more than 40% of
GDP. Subsequent interest payments, in turn, absorb crucial development and social expenditure.
Tax system reform is critical. Bolstering revenues remains one of the government’s economic imperatives. For this to
happen, wholesale overhaul of the tax system is required. Special emphasis has to be directed toward the widespread
incidence of tax evasion, especially among the country’s feudal elites. The government has taken initial steps to rectify the
situation, including extension of the general sales tax to the retail sector and implementation of a registration drive
foreshadowing implementation of a new income-tax law. Other steps include deregulation of state-administered prices,
most importantly that of oil increase of privatization receipts. Yet the impact of restructuring, even if pursued fully, will not
be felt for some time. In the interim, tight restraints will need to be placed on spending, with resources allocated to
prioritize development.
Challenges to attracting investment. Enticing investment flows back into Pakistan depends not only on a revived
credibility in the government's economic management, but also on the creation of a level and clean playing field for
investment in the country. Liberalization and deregulation need to be supported by strong legal frameworks. Endemic
bureaucratic corruption remains a significant structural weakness. Enhancement of transparency and standards of
governance remain essential for attracting investment. Reform of the civil service, police, and judiciary systems remains
imperative, in conjunction with implementation of standards and regulations for fiscal management. Other necessary
actions include decentralization of authority, to increase local government participation in spending; the prioritization and
monitoring of public expenditure; and the accountability of public officials.
The development of mineral resources has been limited, and is dominated by the public sector. There has been
little or no modern exploration, and only simple technologies have been employed, directly reflecting the lack of
private-sector and foreign-investor involvement in the sector. This is not being accomplished because of the traditional
focus on manufacturing and agriculture, and an unattractive investment climate.
Redirection of significant resources to development is pivotal for sustained long-term growth. Poverty has
increased over the past decade, with around one-third of the population currently below the poverty line, compared with
one-fifth in the 1980s. The planned 10% increases in much-needed social spending could be at risk if low tax revenue
continues to paralyze state capacity. Deficiencies in revenue collection and high defense spending render fiscal stability
difficult, which in turn impacts on poverty-reduction measures and social and economic development. Underdevelopment
of human resources is mirrored in Pakistan's physical infrastructure, which remains grossly underutilized and inefficient.
Export-base diversification is critical. Diversification of the export base is crucial, particularly in light of increasing
competition in the key European Union market from emerging East European economies. Pakistan's export profile is
dominated by one commodity: textiles. Springing from rapid growth in cotton production in the 1980s and 1990s,
downstream cotton manufactures have come to account for more than 75% of total exports. The growth of the textile
industry has not, however, been associated with a concomitant growth in exports. During 1990-99, the value of Pakistan's
exports in dollar terms grew by an average 7% yearly, compared with 9% to 16% among other developing countries in the
region. Such a high degree of concentration naturally exposes exports to downturn risks, especially since trade is skewed
to European and U.S. markets. Since 1992, trade has been hit by shocks, including poor harvests, and it has been
undermined by poor competitiveness.
Economic Structure and Context: Demographics and Labor Markets

The International Monetary Fund estimates the total labor force to be 51.78 million, 67% of which is in the rural
areas. A major portion of the population in Pakistan works in the informal sector and agriculture. Because of the
agricultural sector's inability to absorb the surplus rural labor, there is a steady rural-urban migration. Unemployment is a
problem in Pakistan, despite government claims of controlling it. The literacy rate is 65.5% among the youth. Proficiency in
English among professionals is high, and a relatively large pool of skilled industrial labor exists. In addition, there are
pockets of impressive know-how in engineering and the sciences.
Child labor continues to be a problem. With more than 3.3 million children between the ages of 5 and 14 currently
engaged in full-time employment, child labor is a further problem in Pakistan’s labor markets. Current targets in
conjunction with international bodies such as the World Bank include the eradication of child labor and a broadening of the
social safety net to support a fluid labor market.
Economic Structure and Context: Monetary System
Pakistan's currency is the rupee. The central authority is the State Bank of Pakistan. The monetary system is anchored on
a monetary-targeting framework, and operates in a managed floating exchange rate with no pre-announced path for the
exchange rate.
Monetary policy is anchored on a monetary-targeting framework. To regulate the volume and the direction of the flow of
credit to different uses and sectors, the State Bank makes use of both direct and indirect instruments of monetary
management. Until recently, the monetary and credit scenario was characterized by acute segmentation of credit markets
with all the attendant distortions. Pakistan embarked upon a program of financial-sector reforms in the late 1980s. A
number of fundamental changes have since been made in the conduct of monetary management that essentially marked
a departure from administrative controls and quantitative restrictions to market-based monetary management. A reserve
money management program has been developed. In terms of the program, the intermediate target of M2 (broad money)
would be achieved by observing the desired path of reserve money—the operating target. Although use is now being
made of such indirect instruments of control as cash-reserve ratio and liquidity ratio, the program's reliance is mainly on
open-market operations.
The effectiveness of monetary policy has been largely constrained by systematic fiscal overruns. The State Bank of
Pakistan has been preoccupied with monitoring the exchange rate, easing the bad-loan problem among Pakistan's banks,
and providing the credit environment necessary to jump-start the economy.
Economic Structure and Context: Financial System

The major accomplishment within the financial system has been turning the predominantly state-owned banking system
into one that is instead predominantly owned by the private sector. Currently, 85% of the banking sector is privatized, as a
result of strong liberalization in the 1990s. A large number of banks are now foreign-owned. A joint Financial Sector
Assessment Program mission by the International Monetary Fund and the World Bank evaluated Pakistan's
financial-sector system in early 2004, and noted that the reforms have resulted in a more efficient and competitive financial
system.
Burdened with a large volume of nonperforming loans, the financial sector is weak and uncompetitive. In a recent survey,
the State Bank of Pakistan stated that further reforms in the banking and financial sector over the medium term must
include the promotion of transparency and accountability; the observance of international standards; strengthening the
financial system through better financial supervision; further privatization of public-sector banks; and divesting their shares
through stock exchanges to retail investors.
Pakistan's main stock market is the Karachi Stock Exchange.
Economic Structure and Context: Key Sectors
Agriculture: About 28% of Pakistan's total land area is cultivated. Agriculture and related activities, including
fishing, engage nearly half of the workforce and provide about 18% of the GDP. Chief cash crops are cotton
(textiles, yarn, and fabrics produce more than one-half of export earnings) and rice. Accounting for more than 50%
of exports (if textile products are included), the performance of the cotton sector dictates the performance of the
agrarian-based economy. The agricultural sector is subject to volatility, given potential adverse weather conditions
and pest damage. Agriculture will get a lift from investments made in irrigation infrastructure in the past few years
to combat drought. Adoption of water-saving techniques by farmers during the drought years will also benefit
agricultural production.
Textiles: Pakistan's largest industry, textile production, has seen a sharp increase in investment, as indicated by
the more than doubling of imports of textile machinery in the past three years. This has substantially improved the
prospects of the industry. The rapid development of the textile sector, coupled with Pakistan's pool of inexpensive
labor, has attracted global brands, particularly in the manufacture of sportswear. The large-scale manufacturing
sector, especially the textile industry, is expected to grow by 8-9% in the next two years. Principal textile products
include garments, towels, household linens, and soft toys. That said, increased international competition after the
phase-out of the Multifibre Agreement in December 2004 has raised concerns about the sector’s future.
Oil and gas: The government has attached high importance to developing the domestic oil and gas industry as a
potentially major earner of foreign exchange. Particular emphasis is placed on natural gas. Policy has
concentrated on offering incentives for the development of upstream and downstream industries.
Communications: The telecommunications sector has significant potential for growth. The privatization of the
Pakistan Telecommunication Company Limited is expected to open the market. Latent consumer demand is being
massaged by government incentives for investment in fiber-optic networks, digital switching systems, and data
communications networks. Recently, the Pakistan Telecommunication Authority issued 19 licenses to initiate
fixed-line and cellular phone services in the country. The government announced in July 2004 that a
communication city will be set up in Islamabad as a base for high-technology and media companies.
Pharmaceuticals: Pakistan is positioned to participate in the current boom in the pharmaceutical industry in
developing countries. There are more than 400 licensed pharmaceutical companies in Pakistan, including 35
multinationals that have more than 60% of the market share. Approximately one-third of Pakistan's total
consumption of pharmaceuticals is imported. The sector is currently circumscribed by high tariffs and taxes,
however. The manufacture of surgical instruments is already firmly established, producing equipment for both
human and animal medicine.
Information technology: The government is planning to establish three software technology parks to divert some
of the investment flows currently flooding into neighboring India's information-technology sector. With the
introduction and growth of Internet and e-mail facilities in major cities, the demand for personal computers is
expected to rise rapidly within the next five years.
Pakistan: Top-10 Sectors Ranked by Value Added
2008 Level 2009 Percent Change Percent Share of GDP
(Bil. US$) (Real terms) (Nominal terms)
1. Agriculture 29.9 -3.1 17.8
2. Retail Trade - Total 13.8 0.0 8.2
3. Wholesale Trade 11.1 -0.3 6.6
4. Public Admin. and Defense 10.0 0.9 5.9
5. Telecommunications 9.0 1.4 5.3
6. Health and Social Services 7.5 1.4 4.4
7. Hotels and Restaurants 6.7 -0.4 4.0
8. Education 5.8 1.1 3.5
9. Oil and Gas Mining 5.6 0.1 3.3
10. Construction 3.7 -1.2 2.2
Top-10 Total 103.1 61.3

Source: World Industry Service, IHS Global Insight, Inc.
Updated: 25 Aug 2009
Economic Structure and Context: Natural Resources

About 25% of Pakistan's total land area is under cultivation, and is watered by one of the largest irrigation systems in the
world. Agriculture accounts for about 18% of GDP and employs nearly half of the labor force. Seventy-five percent of the
value of total crop output is from wheat, sugarcane, cotton, and rice. The nation's dominant export industry is textiles and
garments, and therefore, the cotton crop is of particular importance.
Pakistan faces environmental problems such as deforestation, erosion, land degradation, and desertification, as a result of
poor agricultural practices and limited forest resources. Further environmental degradation is caused by industrialization
and the pollution from pesticides, fertilizers, and other chemical toxins.
Oil was first discovered in small quantities in 1915, and exploration in the 1950s and 1980s revealed several new fields in
the border between Baluchistan and Punjab provinces and the Sindh province. The energy resources have not been
exploited because of a shortage of capital and domestic political constraints. In fact, domestic petroleum production falls
much below the country's oil needs, and the need to import oil has contributed to Pakistan's trade deficits and shortages of
foreign exchange. Pakistan has substantial natural gas resources of its own, but not of the scale for export.
Pakistan is endowed with extensive geological potential. Mineral resources include salt, chromite, coal, gypsum,
limestone, iron ore, sulfur, clay, graphite, manganese, and copper. Many known mineral deposits, particularly of iron ore
and coal, are low grade. Moreover, Pakistan possesses diverse plant-life species, many of which have medicinal value,
and are therefore a valuable resource.
Economic Structure and Context: Trade Profile
Textiles and garments remain Pakistan’s main export production, accounting for more than half of total exports. In
particular, cotton yarn, sleepwear, and ready-made garments feature strongly in foreign sales. Among other manufacturing
exports, carpets, petroleum goods, sports goods, leather manufacturing, and chemicals and pharmaceuticals are
noteworthy. Agricultural exports are smaller, but they still account for a significant share of total sales. Here, rice, fish,
leather, and fruits lead the list. As to main export destinations, the United States and the European Union remain on top of
the table, each absorbing around one-quarter of total exports. Among other main importers are the United Arab Emirates,
Afghanistan, and Hong Kong.
EXPORTS IMPORTS
United States 3.480 16.094 China 6.591 14.282
Afghanistan 1.865 8.625 United Arab Emirates 5.223 11.319
United Kingdom 0.969 4.479 Kuwait 2.519 5.460
China 0.916 4.234 United States 2.192 4.751
Germany 0.827 3.822 Malaysia 1.906 4.130
Saudi Arabia 0.717 3.316 India 1.704 3.693
Italy 0.662 3.062 Japan 1.599 3.466
South Korea 0.574 2.653 Germany 1.365 2.958
Turkey 0.533 2.465 Singapore 1.302 2.821
EXPORTS IMPORTS
United States 2.237 25.182 Kuwait 1.274 11.883
United Kingdom 0.586 6.597 United Arab Emirates 1.139 10.626
Hong Kong 0.533 6.005 United States 0.653 6.091
Germany 0.508 5.724 Japan 0.607 5.665
France 0.272 3.058 China 0.538 5.016
South Korea 0.260 2.924 Malaysia 0.439 4.096
Saudi Arabia 0.240 2.702 Germany 0.389 3.624
China 0.237 2.671 South Korea 0.356 3.322
Netherlands 0.237 2.670 United Kingdom 0.345 3.220
Medium- and Long-Term: Outlook

Growth is expected to hover around 4% in the medium and long term, while less-balanced structure could raise
economic vulnerability. On the back of volatile capital inflows—in the form of investment, foreign aid, and workers’
remittances—growth is expected to remain at around 4% in the medium and long term. Given the central bank’s dual
commitment to price stability and economic growth, accommodative domestic liquidity will further support domestic
demand conditions. Growth impetus should also stem from the public side, as foreign aid commitments boost
development expenditures. As to the growth structure, the service sector, currently above 50% of GDP, will remain the
main growth driver. With continued domestic liberalization and foreign company entry, the finance and insurance sector as
well as transport and communication activities will continue to show strong growth. Accommodative monetary conditions
will support these consumption expenditures. The industrial sector, in turn, could experience a slowdown over years to
come. Increased import liberalization will lead to a substitution toward foreign products, while stark international
competition could weigh on Pakistan’s export industry. This is especially important in the crucial textiles and garment
sector, which accounts for more than two-thirds of total exports and 40% of employment. A number of factors have added
significant pressures on textiles sales, including the elimination of the international quota system in December 2004;
Pakistan’s ineligibility for the European Union’s Generalized System of Preferences; the fact that Bangladesh, Sri Lanka,
and Vietnam have been given this concession; and free-trade agreements between the United States and many of
Pakistan’s competitors. In addition, the Asian Development Bank reports that high business costs, together with low labor
productivity, hinder the sector. In the medium term, slowing industrial-sector growth will be compensated by service sector
activity. Nevertheless, this could add future vulnerability to external shocks—especially in the external sector—if resources
are not directed into expanding Pakistan's productive (export) capacity. This is especially warranted given Pakistan’s
continued, strong reliance on volatile agricultural production, accounting for one-quarter of GDP. In addition to being
dependent on weather conditions, the sector's growth is restrained by fertilizer as well as energy shortages and a lack of
transport infrastructure.
Changing global conditions pose a substantial risk to economic growth. Pakistan’s strong economic growth
performance in the past years was largely driven by favorable international conditions. While high international oil prices
weighed on the trade balance, the boost in international liquidity, especially in oil-producing nations, supported
foreign-exchange reserves via strong capital inflows. Strong liquidity in the financial system, in turn, supported credit
growth and allowed government borrowing from the domestic banking system. Favorable international conditions were
also reflected in surging workers’ remittances from Pakistanis working overseas. Although import growth after recovering
from the current slump in domestic demand would remain relatively high—given the domestic economic
structure—slowing international demand would also weigh on exports. The worsening international environment has
already taken its toll on domestic economic activity. As such, diversifying the domestic production structure and
strengthening domestic demand will be crucial to reducing external vulnerability. In the meantime, it is expected that
concessional financing will remain an important support to external balances—conditioned on a continued political
alignment with the United States.
Structural shortcomings and a weak fiscal position weigh on medium-term growth. Despite Pakistan’s improved
economic performance over recent years, a range of structural shortcomings continue to hamper sustained economic
development and a reduction in pervasive poverty rates. According to the International Monetary Fund (IMF), 32% of
Pakistan’s population still lives below the official poverty line and average GDP per capita remains low, at an estimated
US$1,016 in fiscal year 2009. Infrastructure shortcomings and lack of skilled labor constitute a major deterrent to
sustainable medium-term growth. Unreliable power and telecommunication networks may be the main difficulties that
businesses face, but the transport sector in particular is in need of investment to meet increasing demand from personal
and freight traffic. There are emerging skills shortages, as benchmark literacy rates stand at just 44%, compared with 64%
in countries with similar per capita incomes. Furthermore, despite recent improvements, Pakistan’s fragile fiscal situation
remains a major concern for medium-term growth. Tax collection has remained at a very low 8.8% of GDP. This is due to
pervasive tax evasion—especially among the feudal elite—and a sustained dependence on import-related taxes in the
face of increased trade liberalization. Combined with high military expenditure and interest payments, this low collection
rate has led to onerous domestic public-debt levels of more than 50% of GDP. Because of the large debt-service burden,
which continues to absorb valuable resources for productive and social investment, fiscal deficits have remained between
3.0% and 5.0% over recent years, reaching the highest level of 7.8% in fiscal year 2008, despite primary surpluses of
more than 2.0%.
Substantial risk continues to stem from the political side. Probably the greatest risk to Pakistan’s medium-term
outlook still stems from the political side. Islamist extremism remains one of the major issues facing Pakistan. Although the
country’s classification as a “fragile state” and President Asif Ali Zardari's alignment with the United States have secured
billions of U.S. aid inflows, sustained political insecurity affects foreign investment and tourism, and disrupts domestic
economic activity—such as a slowdown in mining activity in Baluchistan has shown. The current political impasse is just a
reflection of the deep underlying divisions that characterize Pakistan and its difficulty in remaining a unified state.
Furthermore, corruption remains a significant issue in both Pakistan's politics and in the country's institutions more widely.
This, together with a slow and nontransparent bureaucracy, a weak legal framework, and inconsistent policy
implementation continue to thwart investment activity. A recent International Finance Corporation study lists land
regulations, tax administration, business registration procedures, and labor regulations as significant investment barriers.
Hence, unless it addresses many of these problems, Pakistan has little hope of tackling its pressing development issues.
Although higher levels of economic growth have aided the situation in recent years, Pakistan needs to address its still
markedly feudal structure, pursue further reform (including within the political and military spheres), tackle domestic
extremism and the poor security situation, and strive for higher levels of growth.
Executive Summary: Legal Environment Overview

Neglect, corruption and a general lack of funding have produced a number of problems for Pakistan's legal system.
Difficulties include long delays, the lack of a centralised co-ordinating body to develop policy, a lack of professional
management and a shortage of judges, inadequate infrastructure, and meagre public access to justice. These factors
have been exacerbated by a decline in the standard of legal education and professional standards, and sometimes undue
political influence on the judiciary. Some changes have been made, but overall the legal system needs extensive
development. It is widely mistrusted, partly for its slowness, but largely because it is seen to be corrupt and a tool of the
administration. The legal system is not perceived as intrinsically anti-foreign, but its apparent inability to respond quickly
makes it an inherent obstacle to business. Significant problems remain unaddressed, although the system has potential
for reform. Positive moves have been made by the Supreme Court in 2009 that generally aim at strengthening the rule of
law, including declaring the November 2007 state of emergency and laws passed during this period as unconstitutional
and invalid, and the rescinding of a controversial graft amnesty.
Institutions: Structure
Overview
Pakistan's legal system is based on a combination of English common law and codified British Indian legislation—inherited
before the partition—and Sharia (Islamic) law. The country has a written constitution from 1973, although doubts have
been expressed as to its validity, following the numerous amendments that it has suffered in subsequent years. All
legislation and judicial decisions, including, since 1999 those on financial transactions, are subject to review by the
Federal Sharia Court to ensure that they are compatible with Islam.
In addition to the formal judiciary, unofficial court systems can be found in tribal areas, the Federally Administered Tribal
Areas (FATA) and northern parts of the country. These are based on Sharia law and tribal practices.
The executive and judiciary were separated in 2001, although the latter has shown no real signs of becoming more
efficient as a result. There are two tiers of judiciary: the superior, which includes the Supreme Court and four high courts
(one for each province), and the subordinate, which comprises all other court types.
Sharia Law
Foreign investors will find it essential to seek specialist advice, due to the prevalence of Sharia law, in a legal system
heavily influenced by Islamic texts and customs. Pakistani Sharia derives from the Qur'an and a strand of Sunni law called
Hannafe, although theological scholars will also take advice from other schools.
When the Federal Sharia Court was first set up as a type of supreme court under General ul-Haq, it could not review the
constitution, civil and criminal procedure, family law or financial transactions to ensure compliance with Sharia. These
exclusions, however, expired under Benazir Bhutto and the court now has the ability to declare any law incompatible with
Islam invalid.
Dispute Resolution
Pakistan is a signatory to the Convention for the Recognition and Enforcement of Foreign Arbitral Awards and the
Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. Furthermore, the
Arbitration Act of 1940 provides a means by which parties can resolve their commercial disputes out of court; the parties
can either appoint a joint arbitrator, or each can appoint an arbitrator with a further, neutral arbitrator joining them to form a
panel. The office of ombudsman was established in 1983, tasked with addressing public complaints against the
government. The government has since launched reforms in the area of dispute resolution, although these are currently
stalled.
Institutions: Transparency and Effectiveness

Regulatory Indicators
2005 2006 2007 2008 2009
Procedures to Enforce a Contract 47 47 47 47 47
Number of Start-up Procedures to Register a Business 11 11 11 11 10
Time to Start a Business (days) 24 24 24 24 20
Time to Register a Property (days) 50 50 50 50 50
Time to Resolve Insolvency (years) 3 3 3 3 3
Source: World Bank: World Development Indicators
Business Regulation: Company Law and Corporate Governance

General: A foreign investor wishing to establish a business in Pakistan can do so by: opening a branch office, setting up a
sole proprietorship, entering into a partnership, forming a limited company, acquiring a business, or appointing an agent.
Of most relevance to foreign investors is opening a branch office or setting up a limited company. If setting up a limited
company, the provisions of the Companies Ordinance 1984 are applicable.
Procedures: According to the World Bank's Doing Business in 2010 report, 10 procedures need to be undertaken to start
a business in Pakistan that take on average 20 days to complete. This is a marked improvement compared with Pakistan's
80th place in 2009, and is due to Pakistani authorities shifting increasingly to electronic registration modes that are more
time-efficient and transparent. The procedures now comprise (1) the e-filing of the company name with the Securities and
Exchange Commission (online), where it will be checked that the proposed name is not inappropriate and does not offend
any religion in any way, (2) the paying of relevant registration fees, (3) registering the company at the Registrar of
Companies (this can now be done online, which is a marked improvement compared to time-consuming previous
practices), (4) the obtaining of a digital signature from the National Institutional Facilitation Technologies (NIFT), (5) the
application for a national tax number (NTN) and for income tax, (6) the registration for sales tax, (7) registration for
Professional Tax with the relevant local authorities, (8) registration with the Employee Social Security Institution, (9)
registration with the Employees Old-Age Benefits Institution (EOBI) and (10) the registration with the Pakistan Shops and
Establishments Ordinance.
Corporate Governance: The country is actively courting the involvement of the likes of the Asian Development Bank
(ADB) and the World Bank to help it in its moves to address overall reform. The issue of corporate governance therefore
has some currency, and a number of areas - such as banking - have guidelines in place. In October 2006, the
International Finance Corporation (IFC), the Securities and Exchange Commission of Pakistan (SECP) and the Pakistan
Institute of Corporate Governance (PICG) launched a nationwide corporate governance survey that was completed in
2007. The aim of this was to collect information that serves as a benchmark for improving corporate governance,
particularly in companies and banks. Beyond this, however, the situation and legislation governing the issue remains in its
infancy.
Business Regulation: Bankruptcy

Globally, modern bankruptcy procedures are in their infancy; even in the best-performing jurisdictions, the average age of
bankruptcy legislation is just ten years. Pakistan does not yet have a bankruptcy law. According to the World Bank's Doing
Business in 2010 report, it takes a business an average of 2.8 years to close a business, with a recovery rate of 39.2 cents
to the dollar. Despite the lack of a bankruptcy law, this places Pakistan well above the regional average of South Asia.
Business Regulation: Competition

Since October 2007 the Competition Commission of Pakistan (CCP), founded following the passing of the Competition
Ordinance, 2007, constitutes the legal framework in Pakistan for all issues related to competition. The CCP, formed with
the aid of the World Bank and the British Department for International Development (DFID), replaced the
less-than-effective Monopoly Control Authority (MCA). The CCP was formed in the hope that it would better take into
account current economic developments, and to more effectively crack down on, among others, abuse of market
dominance and anti-competitive agreements. In May 2010 the Senate Standing Committee on Finance approved the
Competition Bill 2010, which would shift responsibility from high courts to specialised competition tribunals to hear appeals
against decision by the CCP, while penalty caps would also be increased. Since then, however, little further progress has
been made.
Business Regulation: Employment

Labour Law
The constitution provides several provisions on labour, including the prohibition of child labour, forced labour and slavery,
and the right to form unions. Additionally there are a number of more specific labour regulations in place. For example,
relations between employers and employees are regulated by the Industrial and Commercial Employment (Standing
Order) Ordinance, 1968. Relevant is also the Industrial Relations Ordinance, 2002, which entails provisions on workers
representation, but which will expire in 2010 if not re-enacted. Working conditions in factories with more than 10
employees are covered by the Factories Act, 1934.
Labour Flexibility
Pakistan ranks only 146th out of 183 assessed economies in the "employing workers" category in the World Bank’s Doing
Business in 2010 report. Prospective investors will find particular difficulties in hiring staff, as indicated by the World Bank
index score of 78 (on a scale of 0-100, with 100 representing toughest regulations), while regulations on the rigidity of
hours are comparably lax at 20 on the same index scale.
Work Permits for Foreigners
The labour laws of Pakistan do not distinguish between foreign and Pakistani employers. The technical and managerial
personnel do not have to obtain a work permit for working in the manufacturing/industrial and infrastructure sectors and
the only requirement is a work visa. This facility has also been extended to newly opened sectors of the economy,
including Agriculture, Service and Social Sectors.
Foreign expatriate personnel will not be permitted to take on jobs other than managerial and technical ones. However, in
cases where the employment is required for the transfer of a particular skill, a work visa will be allowed subject to the
condition of transfer of the job to a citizen of Pakistan within a specified period.
Business Regulation: Environmental

The Constitution contains provisions for environmental protection and conservation, and several laws exist to this end.
Some of these exist only at provincial level, such as the Punjab Wildlife (Protection, Conservation and Management) Act
(1964). Two important pieces of legislation came into effect during the 1990s. Since July 1996 it has been mandatory for
industries to adopt National Environmental Quality standards (NEQs), with severe penalties for non-compliance. In
addition, the Pakistan Environmental Protection Act (1997) is a fairly comprehensive piece of legislation, providing for the
protection, conservation, rehabilitation and improvement of the environment. It contains action plans and programmes for
the prevention of pollution and the preservation of a clean and healthy environment. Relevant updates to the Act include
the National Environmental Quality Standards (Self-Monitoring the Reporting by Industries) Rules (2001), Industrial
Pollution Charge (Calculation and Collection) Rules (2002), and the Administrative Penalty Rules (2005).
Business Regulation: Intellectual Property

Pakistan is a signatory to the Marrakesh Agreement of 1994 that established the World Trade Organisation (WTO). Under
the provisions of this Agreement all states that subscribe to WTO become bound to a mutual recognition of intellectual
property rights at a higher level of protection than the older conventions could offer. Consequently, intellectual property
laws in Pakistan are being brought in conformity with the WTO Agreements.
As a result, the country is not only obliged to comply with TRIPS, but has also enacted laws related to issues such as
copyright, patents and trademarks. The Patent Ordinance and Trademarks Ordinance were both passed in 2000, while the
Trademarks Ordinance 2001 added to the Trademarks Act 1940, providing - for the first time - for the registration of
service marks for a number of service categories. The initial registration of a trademark is for a period of seven years, after
which it can be renewed for 15 years at a time. The Patents and Designs Act (II of 1911) protects the designs and
inventions and according to Section 3(1) of the Act an application for a design may be made by any person whether he is
a citizen of Pakistan, or not, and whether alone or jointly with any other person. The life of a patent is 16 years.
The present law relating to copyright is the Copyright Ordinance, (V of 1962) as amended in 1972, 1973, 1992 and 2000.
Pakistan is a signatory to the Berne Convention for the Protection of Literary and Artistic Works of 1886 and the Universal
Copyright Convention of 1952. The infringement of copyright is a cognisable and non-bailable offence triable by a
Magistrate of the First Class punishable by imprisonment, which may extend to three years, or by a fine, which may
extend to 100,000 rupees or both.
Traditionally, enforcement of intellectual property rights (IPR) has been poor. Piracy of audio cassettes, videos and books
is common, while police generally display no interest in cases of IPR infringement. Taking the matter to court is a lengthy
and costly process. Although trademarks are legally recognised, their protection remains largely inadequate. In April 2008,
2009, and again in 2010, the U.S. government retained Pakistan in its Priority Watch List in its annual "Special 301
Report" on intellectual property protection.
Business Regulation: Financial Crime
The Anti-Money Laundering Ordinance 2007 (AMLO) was passed in September 2007 after immense international
pressure on the Pakistani government to counter financing networks for terrorist activities. The AMLO provides for
legislation on, among other things, punishment for money-laundering and procedures and manners of furnishing
information by financial institutions. The AMLO also envisaged the establishment of a National Committee to combat
money laundering and a Financial Monitoring Unit, with these institutions having substantial powers in terms of
investigating financial crime, search and seizure, search of persons, and the power to arrest. However, Pakistan’s legal
and regulatory structure is not developed enough to allow a fully effective anti-terrorism financing and anti-money
laundering regime. Rampant corruption has also hindered efficient law enforcement.
Business Regulation: Land

Foreign-owned companies are free to acquire land or buildings. All real estate acquisitions are on lease terms of 33-99
years. There are some restrictions on land ownership and usage, which include areas that the provincial government
deems undesirable for the establishment of new industry. Town planners must approve investors building plans for safety,
but this is no real obstacle. Building permits are not required.
Generally, the implementation of broad land reform is required. This however, is hobbled by a Supreme Court ruling made
in 1991 in which the 1977 Land Reform Act was found to be un-Islamic in parts, ensuring that it could not be fully enacted.
Beyond issues such as land-grabbing, it is hoped that better regulation will prevent corruption among senior officials, some
of whom have traditionally allocated themselves and family members too many plots of land.
Pakistan ranks 119th out of 183 assessed economies in the "registering properties" category in the World Bank's Doing
Business in 2010 report.
FDI Regulation: Foreign Exchange and Profit Repatriation

As a protection against nationalisation, and a guarantee of the availability of foreign exchange for profit remittance,
investors bringing in equity from abroad must go to the State Bank of Pakistan (SBP, the central bank) and register a
certificate of encashment of foreign currency, proving the source of investment.
In 1991, the government lifted nearly all exchange controls—foreigners may open foreign currency accounts with any
bank, bring in any amount of funds and make remittances abroad. They are also free to hold domestic currency. In June
1994 the Pakistani rupee was made fully convertible (a managed float of basket currencies determines its parity with other
currencies). In February 1998, the State Bank of Pakistan (SBP) allowed local and foreign commercial banks to determine
their own daily exchange rates for all foreign currencies, except the US dollar. The Foreign Private Investment (Promotion
and Protection) Act 1976, and the affiliated Act No. XII of 1992 guarantee the repatriation of capital, profits, dividends and
principal payments at prevailing exchange rates; although banks, insurance companies, foreign airlines and foreign
shipping companies must obtain SBP clearances for remittances. The SBP tightened the rules in June 2004, pressing
informal money exchangers to register as foreign exchange companies by August of that year. This has not only
consolidated the regime, but has also ensured stronger monitoring and much more effective regulation of the industry. As
Pakistan’s foreign-exchange reserves dropped in 2008, the government pledged to further clamp down on the illegal
transfer of foreign currency through the hawala and hundi systems. Notably, in October 2008 the Federal Investigation
Agency (FIA) conducted a raid on the offices of Khanani & Kalia International (Pvt) Ltd (KKI), the country's largest
exchange company.
The remittance of proceeds of shares from companies listed on the stock exchange is not restricted. Licensing fees may
be repatriated only if the licensing arrangement is reported to the SBP. There are no ceilings on payments of royalties and
technical fees. Foreign companies may borrow abroad on whatever terms they believe appropriate. There are no
restrictions on the reinvestment of profits.
FDI Regulation: Investment and Privatisation

Investment
Pakistan has recognised the need to increase foreign direct investment (FDI), as well as heeding domestic calls for
greater information regarding such factors as World Trade Organization (WTO) developments. In January 2004, the
Federation of Pakistan Chambers of Commerce and Industry (FPCCI) and the International Chamber of Commerce (ICC)
signed a Memorandum of Understanding (MoU) to help secure the appropriate legislation to facilitate FDI and greater
trade. In addition, the two trade bodies have pressured the government to ratify a number of international trading
agreements. As with other issues that the government is attempting to tackle, it has effectively brought in an outside
arbiter—in this case the ICC—to help its cause. This should make its campaign more effective, but there are many
reasons why the country's FDI levels are poor, including a collapsing domestic security situation.
It was revealed in September 2004 that the government had finalised a draft foreign investment bill, to provide greater
protection for investors. The National Assembly Standing Committee on Privatisation approved the Foreign Private
Investment (Promotion and Protection) Amendment Bill in April 2005, progressing the legislation a stage further. The move
reportedly came in response to international pressure, particularly from the United States, the country's top source of FDI.
It is these international ties that have furthered progress on the bill, with the government well aware that other members of
the international community have been deterred from operating in Pakistan, because of a lack of protection for their
investors. As of May 2010 the bill has not been passed.
Privatisation
A two-track strategy for privatisation was pursued under the military rule of the Musharraf government, identifying
short-term and medium-term programmes. These moves included the passing of a variety of privatisation laws in 2000
and 2001 that are designed to ensure transparency in the process, and to attract investors to major sectors, including
telecommunications, banking and the oil and gas sectors. Most notably, the Privatisation Commission Ordinance 2000
provided for the establishment of a Privatisation Commission tasked with providing information for investors as well as
overseeing the process of privatisation. Until 2007, the government of Pakistan has completed or approved a total of 167
transactions at a gross sale price of about 476 billion rupees. It is likely that privatisation efforts will be accelerated under
the US$7.6-billion loan programme from the International Monetary Fund (IMF) in order for the government to stabilise its
fiscal position over the medium term.
FDI Regulation: Procurement

A number of donor bodies, including the World Bank and the Asian Development Bank (ADB), have been working with
Pakistan to address its procurement issues. Legislation is limited and donors are pressing for new norms to guide the
process more effectively and bring regulations in line with international law and expectations.
FDI Regulation: Major International Agreements
Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (signed in
1965, ratified in 1966).
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958; signed and ratified in October
2005).
Legal: Legal Links

Texts of Laws/Legislation Codes
Privatisation Commission, Privatisation Laws

Pakistan Environmental Protection Agency, Legislation and Regulations
Board of Investors (BOI), Board of Investment Ordinance 2001
Government of Pakistan, Constitution incl. Amendments
Securities and Exchange Commission of Pakistan, Corporate Laws
Tax Library
Ministries/Authorities/Boards/Agencies
Ministry of Commerce
Ministry of Environment Local and Rural Development
Federal Board of Revenue
National Tariff Commission
Trade Development Authority of Pakistan
Federation of Pakistan Chambers of Commerce and Industry
Lahore Chamber of Commerce and Industry
Ministry of Finance
Privatisation Commission
Pakistan Board of Investment
Official Government Site
Ministry of Petroleum & Natural Resources
Competition Commission of Pakistan
Courts
Supreme Court of Pakistan

Judiciary
Lahore High Court
Sindh High Court
Peshawar High Court
National/Reserve Banks
State Bank of Pakistan
Stock Exchanges
Karachi Stock Exchange
Executive Summary: Tax Environment Overview

Pakistan's tax system is underdeveloped and is not conducive to carrying out business with any ease. It suffers from one
of the world's lowest tax-to-GDP ratios, a narrow tax base in which only certain sections of society are taxed, tax evasion
due to weak audit and enforcement procedures, and lack of transparency. There have been moves by the Pakistani
authorities to improve the system, and slow progress is being made, particularly since tax reforms are part of the
conditions that the IMF set in return for the disbursal of a massive bailout package in November 2008. As part of the tax
reforms the government aims to introduce a single-rate value-added tax (VAT) to replace the multiplicity of rates of the
current general sales tax (GST) system, although the implementation has been repeatedly delayed. It is now envisaged to
become effective from 1 November 2010.
Key Rates: Snap-Shot

Tax Snapshot
Corporate Taxes Rate (% unless otherwise stated)
Corporate Income Tax Rate 35
Capital Gains Tax Rate 35 (a)
Branch Tax Rate 35
Net Operating Losses
Carry-Back (Years) 0
Carry-Forward (Years) 6
Other Taxes Rate
Individual Income Tax Rate (Top Rate) 0-25
VAT (proposed for 1 November 2010) 15

(a) In certain circumstances only 75% of the gain is taxable
Source: Ernst & Young
Key Rates: Indicators

Taxation Indicators
2002 2003 2004 2005 2006 2007 2008 2009
Highest Marginal Tax Rate, Corporate (%) 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0
Highest Marginal Tax Rate, Individual Rate (%) .. 30.0 30.0 30.0 30.0 20.0 20.0 20.0
Taxes on Income, Profits and Capital Gains (% of total taxes) 30.8 27.5 27.7 28.3 30.0 37.8 .. ..

Policy and Administration: Reform and Future Plans

Pakistan's tax system is underdeveloped, and suffers from one of the lowest tax-to-GDP ratios worldwide at around 9%, a
narrow tax base in which only certain sections of society are taxed, tax evasion due to weak audit and enforcement
procedures, and lack of transparency. There have been moves by the Pakistani authorities to improve the system, and
slow progress is being made, particularly since tax reforms are part of the conditions that the IMF set in return for the
disbursal of a massive bailout package in November 2008.
The shortfall of tax revenues significantly affects the government's ability to achieve social progress, including in the
educational, health and infrastructure sectors, making it paramount for the government to undertake effective measures to
reform the present tax system. As early as in June 2000 the Pakistani government appointed the Task Force on Reform of
Tax Administration that, in conjunction with various government agencies and multilateral bodies, produced a report with
recommendations for the types of reforms required, but progress has been piecemeal since then. Overall, there is a need
to move from short-term solutions that mostly included changes of tax rates, to more long-term and structural changes that
are capable of sustainably increasing tax revenues.
Targets have already been raised, with the government's 2009 Poverty Reduction Strategy Paper (PRSP) envisioning
increasing the country's tax-to-GDP ratio by 3.2 per cent until 2014, although for this reform processes would need to be
greatly accelerated, given that the government proved consistently unable to meet previous and far more modest targets.
This will be difficult to achieve given the opposition of those that profit from the flaws in the current system. In its proposed
budget for FY 2010-11 the government pledged to increase tax revenues and set optimistic, if perhaps unrealistic, tax
revenue targets at 1.779 trillion Pakistani rupees (about 19% up from last year's targets that stood at 1.494 trillion rupees).
One of the key components of tax reforms will be the introduction of value-added tax (VAT) system with a single-rate
system at 15%, which will replace the multiplicity of rates of the current general sales tax (GST) system. However, tax
reforms are delayed as provinces and other shareholders have so far been unable to agree on collection rights. In his
budget speech on 4 June 2010, acting finance minister Abdul Hafeez Shaikh deferred the implementation of the VAT,
which was initially to become effective from 1 July 2010, until 1 October 2010. Delays however still continue, with a new
deadline for implementation now tentatively set for 1 November 2010. Until the implementation of the VAT, the various
rates of the general sales tax (GST, charged at between 16 to 25%) have been raised by one percentage point.
Policy and Administration: Bureaucratic Efficiency

Positive efforts evident in recent budgets have prompted some development of the tax system, but much more work needs
to be done, and as a result the system provides little assistance to the easy progress of international business
transactions. To date, progress in addressing the problems has been largely limited to the area of tariff rates, which have
been lowered drastically—albeit from very high levels. The government faces substantial resistance from Pakistan's
habitual culture of tax evasion, and maladministration, in particular corruption in tax administration, is regarded as a key
problem. As a result the government consistently misses its tax revenue targets. However, the situation appears to be
improving somewhat. According to the Federal Board of Revenue, tax collection in Pakistan for the first ten months of the
fiscal year (FY) 2009-10 has been 1.026 trillion Pakistani rupees, close to the annual target of 1.380 trillion rupees, even
though this target is likely to be missed.
Regulations: Corporate
Corporate tax is currently levied at 35% and is being reduced incrementally, with successive budgets ushering in a gradual
process of change. Companies resident in Pakistan are subject to corporate tax on their global income. Tax is levied on
total income derived from all sources in the accounting period, including dividends and taxable capital gains. Branches of
foreign companies and non-resident companies are taxed only on Pakistan-sourced income.
Withholding Taxes
Withholding tax is classified as an interim tax payment that may or may not be the final tax liability. Amounts withheld that
are not final taxes are credited to the final tax liability for the relevant year. There are numerous maximum withholding
rates provided for in bilateral treaties. Outside of these treaties, withholding tax rates are as follows:
Withholding Taxes
Type of Payment Rate (%)
Dividends 7.5/10
Interest 10
Royalties from Patents etc. 15/30
Fees for Technical Services 6/15
Branch Remittance Tax 0
Source: Ernst & Young
Capital Gains Tax
Only 75% of capital gains is taxed if held for more than 12 months. Capital gains on assets held for 12 months or less are
taxed at the normal corporate rate. These provisions do not apply to capital gains derived from transfers of either public
company shares or real property. Capital gains on real property are not subject to income tax, but provincial governments
impose stamp duties on transactions involving such assets. Capital losses can only be offset against capital gains, and
can be carried forward for six years.
Regulations: Individual
Taxable Income
Taxable income includes all remuneration for employment, income from property, income from business, capital gains and
income from other sources, subject to allowances and additions for certain non-cash benefits.
As per the Finance Act, 2008, income tax for residents in Pakistan for salaried individuals earning more than 8.65 million
Pakistani rupees per year stood at 20% in FY2009/10.
Social Security
There are no social security deductions from individual income in Pakistan.
Regulations: Indirect
General sales tax (GST) is currently imposed at varying rates from 16 to 25% (plus an additional one percentage point
until the new VAT system is implemented). It is a single-point tax, paid at the manufacturing, retail or wholesale level. It is
also applicable to imported goods.
One of the key components of the government’s tax reforms will be the introduction of a value-added tax (VAT) system,
which will replace the GST system currently in place and be imposed at a single rate of 15%. The implementation is
however, delayed, and the new system is not expected to become effective before November 2010.
Executive Summary: Operational Environment Overview

The Pakistani government is actively encouraging foreign investment, but faces formidable challenges in its attempts to
improve the operational environment. Corruption remains endemic at all levels and officials often demand kickbacks.
Bureaucracy is slow and obstructive, and the infrastructure—particularly in the transport sector—falls well short of
desirable standards. Inconsistent policy implementation also poses problems. The government's anti-corruption and
privatisation drive has slowed down significantly amid severe political and security instabilities, which has left numerous
sectors, such as power, agriculture, and financial services in dire need of reform.
FDI Environment: Practical Issues
Religion: Pakistan is a strict Muslim state. Importation of alcohol and pork products into Pakistan is forbidden by
law. Narcotics smuggling is punishable by death. Homosexuality is illegal, as is the co-habitation of a non-married
couple. Close fitting and revealing clothing should be avoided.
Health: There are few hospitals of an acceptable standard outside the major cities of Islamabad, Lahore and
Karachi. Malaria exists in parts of Pakistan, and visitors should seek medical advice before travelling. Health
insurance is strongly recommended.
Money: Pakistan is largely a cash economy. Personal cheques are not commonly accepted. Most Pakistanis do
not use checking accounts for routine transactions. Credit cards and travellers' cheques are accepted by only a
few establishments in the larger cities. There are bank branches, as well as registered money changers in all
international airports. Cash machines are not usually located in airports.
Time: In June 2008, Pakistan switched to daylight savings time (DST), which put the country six hours ahead of
GMT until 31 August. The move is aimed at conserving energy amid the country’s power shortages.
FDI Environment: Patterns of Investment

There is a relatively small range of countries investing in Pakistan. The top five in FY2008/09 were the United States,
United Kingdom, United Arab Emirates, Japan and Hong Kong. The range of areas in which they invested was broad, with
the highest investment witnessed in telecommunications, followed by oil and gas exploration, financial business, trade,
power, construction and transport. Foreign investment has seen significant decline amid a declining global risk appetite
and political instabilities within Pakistan, which has resulted in downward pressure on the exchange rate,
foreign-exchange reserves and stock market. The International Monetary Fund, and so-called "Friends of Pakistan"
grouping of donor nations has sought to revive private sector investment in order to address the country’s severe liquidity
shortage and balance of payments crisis amid strong domestic demand and high oil and commodity prices.
FDI Environment: Attitudes to Investment

The government continues to attach great importance to attracting foreign direct investment (FDI) and efforts to attract
foreign investors appear genuine, as evidenced by numerous investment incentive schemes and active policies towards
liberalisation and deregulation. The Pakistan Investment Board (PIB) was set up in July 1992, and renamed the Board of
Investment (BOI) in April 1994. Its role is to attract foreign investment and provide information on the availability of raw
materials, loans, skilled workers, fiscal incentives, concessions and the infrastructure. Unfortunately, the investment
environment remains characterised by arbitrary policy implementation, although reform is being pursued and its positive
effects are being noted. Inconsistencies remain between government policies and the existing rules, although the BOI and
the government have tried to smooth these out.
FDI Environment: Activism

Environmentalism is a growing issue in Pakistan, but from a low base. The World Bank in its 2007 Pakistan Strategic
Environmental Assessment report has estimated that the economic cost of the country's environmental damage may be as
high as six% of GDP, if broadly taken to include health costs, lost working hours and the degradation of the country's
natural resources.
Major Activist Groups
Some international environmentalist groups maintain a presence in the country including the World Wildlife Fund (WWF)
and Greenpeace International. Campaigns are varied, and focus on such issues as illegal logging in northern Pakistan and
water contamination in other areas. The United Nations Development Programme (UNDP) works closely with the
Environment Ministry, and the partnership has resulted in the creation of the National Environmental Action Plan (NEAP),
which moves to address the link between poverty and environmental degradation at the policy-making level.
Labour: Quality and Availability
Pakistan's 2008/09 Labour Force Survey (LSF), the latest on the market as of August 2010, estimates that there are about
53.72 million people in the labour force of Pakistan, up from 51.78 million in the 2007/08 survey of which most are active in
the agricultural sector (45.1%), followed by trade (16.5%), manufacturing (13%) and services (11.2%). Official
unemployment is low at 5.5%, although this picture changes if the country's rampant underemployment were to be taken
into account. The fact that only 20 of those employed are females points to a significant gender gap in Pakistan's labour
market.
Reflecting the retarded pace of development in Pakistan and a poor educational system, the country's illiteracy rate of
42.6% among adults is above what is already a disconcertingly high regional average. However, proficiency in English is
reasonable and a pool of skilled industrial labour exists, although this has been steadily depleted as a result of emigration,
reflecting the country's dependence on remittances. There are pockets of know-how in engineering and the sciences.
The National Vocational and Technical Education Commission has outlined the National Skills Strategy 2008-12 which
aims to improve the skills and capabilities of Pakistan's workforce.
Labor Force Indicators
2001 2002 2003 2004 2005 2006 2007 2008
Prevalence of HIV (% of population aged 15-49) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 ..
Literacy Rate, Adult Total (% over 15 years) .. .. .. .. 49.9 54.2 .. 53.7
Employment in Agriculture (% of total employment) 48.4 42.1 42.1 43.0 43.0 43.4 43.6 ..
Employment in Industry (% of total employment) 18.0 20.8 20.8 20.3 20.3 20.7 21.0 ..
Employment in Services (% of total employment) 33.5 37.1 37.1 36.6 36.6 35.9 35.4 ..

Labour: Industrial Relations and Workforce Representation

There are more than 8,000 trade unions registered in the public and private sectors, but they represent just 2.5-3% of the
workforce. This, and the fact that unions have so many affiliations, makes the labour movement one of the world's most
divided. The internal disputes as well as rivalry between unions curtail their effectiveness, making organised labour action
relatively uncommon. The authorities and employers have been accused of consistently violating workers' rights, denying
collective bargaining and detaining union leaders. Furthermore, bans are in place that prevent workers in Export
Processing Zones (EPZs) from forming unions or bargaining collectively.
In September 2008, the Industrial Relations Act was passed as an interim solution to be replaced with a comprehensive
law within 18 months, but it was repealed in April 2010 leaving the status of labour courts uncertain. The Act envisaged
the creation of labour appellate tribunals that were to ensure speedy disposal of labour disputes. Labour unions have
protested the Act for not providing enough protection for workers and thereby violating their basic human rights.
Key Unions
Pakistan Workers Federation (PWF): The single largest trade union in Pakistan, established through a merger of the All
Pakistan Federation of Trade Unions (ABFTU), All Pakistan Federation of Labour (APFOL) and the Pakistan National
Federation of Trade Unions (PNFTU). Has eight regional offices in four states, and is affiliated with currently 419 smaller
trade unions. Has a membership of 880,000 workers, the majority of unionised workers in Pakistan and seeks to expand
its base.
Industrial Militancy
Labour unrest is uncommon in Pakistan, although the line is blurred between labour disputes and more frequent civil
activism - protests expressing general political and social discontent can be triggered by labour issues. In turn,
demonstrations linked to specific political issues or cuts in services can take on a labour dimension.
Labour: Business Representation
The Employers' Federation of Pakistan (EFP) is the primary outlet for business representation. It is a member of the
International Organization of Employers (IOE) and represents Pakistani employers at ILO events. It aims to promote,
foster and advance the interests of its members at national and international levels, as well as promote better industrial
relations and the development of human resources. It also acts as a consultancy, providing an advisory service on
questions related to labour matters. It has a 20-member managing committee, which determines policy. The committee
itself is elected biannually, and an additional seven sub-committees recommend policy measures.
Institutional Constraints: Bureaucracy

Bureaucracy remains slow and frequently obstructive, despite efforts at reform. Companies applying for licences from the
federal government in Islamabad report that they need to make frequent visits to ministries to make sure that their
applications are proceeding smoothly through the various processes. Apart from the problems of corruption (see below),
foreign business people report problems arising from arbitrary changes of regulations—for example, those governing
imports of technical equipment—or disputes between rival government departments.
Institutional Constraints: Corruption

In its 2010 corruption perception survey, Transparency International (TI) ranked Pakistan 143rd out of 178 countries,
pertaining to rampant levels of corruption at all levels of society in Pakistan. The root causes of corruption include low pay
among junior officials and a culture of political patronage. Low-ranking officials frequently require small payments (known
as chai pani or 'tea water') to process applications, while senior civil servants and ministers have been accused of seeking
large kickbacks on major investments. Since the 1970s the politicisation of the civil service, the police and other state-run
institutions has led to a sharp decline in professional standards. Close and opaque relations between the political
environment, commerce and civil institutions - including the judiciary - have fostered widespread cronyism and complicit
acceptance of corrupt practice from the top of society down. In light of the situation, many - though not all - foreign
companies have found the payment of bribes largely unavoidable.
Unsurprisingly, the eradication of endemic corruption is one of the key challenges for the government. However,
successive governments have become increasingly preoccupied with the internal security situation. As a result, concerns
have been raised as to just how much the government is willing and able to push the anti-corruption agenda, which has
the potential to implicate vast sections of the country's elite. However, some progress has been made. In August 2007,
Pakistan ratified the United Nations Convention Against Corruption (UNCAC). In 2009 the Holder of Public Office
(Accountability) Act, 2009, was passed, but Transparency International has complained that this bill has major
shortcomings and will allow corruption to flourish at the highest level. Demands have also been made for replacing the
NAB with an Independent Accountability Commission, but no progress has yet been made.
Institutional Constraints: Customs

According to various surveys conducted by international financial institutions, companies in Pakistan highlight customs
and trade regulations as major constraints on doing business, although the World Bank's 2010 Doing Business Report
ranks Pakistan 78th out of 183 countries for the "trading across borders" category. Still, excessive red tape and lengthy
processes lead to problems in upholding regulations and give rise to corrupt practices. Pakistan’s customs authorities
operate under the Federal Board of Revenue (FBR), which is a department of the Ministry of Finance. The customs
authorities are infamous for being one of the most corrupt institutions in Pakistan. However, the FBR has been overseeing
reforms to Pakistan’s customs bodies since February 2002, and modernisation efforts such as the introduction of the
Pakistan Customs Computerized Systems, forms of e-governance and a simplified tariff system have assisted in
eliminating corruption opportunities. Pakistan's customs tariffs bring in the largest single share of national revenue, making
the elimination of corrupt practices that eat into the state budget of crucial importance. Most dutiable items are subject to
ad valorem duties that range from 0% to 30%. Trade with Israel is prohibited.
Physical Constraints: Infrastructure

Pakistan's infrastructure is acceptable in urban areas, particularly in Islamabad and Lahore, but otherwise does not
generally meet Western standards. Unreliable power and telecommunication networks may be the main difficulties that
businesses face, but the transport sector is in particular need of investment in the face of increasing demand from
personal and freight traffic. It is estimated that the inadequacy and inefficiency of the transport system costs the economy
around 4-6% of GDP annually. The government is trying to address the situation, allocating funds specifically for
infrastructural development. Still, the size of the problem is an issue and as such, the authorities regularly have to look to
multilateral agencies, like the Asian Development Bank (ADB) for funding support. The government’s poverty reduction
strategy for 2009-11 particularly identified the need to remove infrastructure bottlenecks that inhibit much of the country’s
growth potential. The devastating floods of July and August 2010 destroyed much infrastructure in many parts of Sindh
province and Khyber Pakhtunkhwa, although it will take months after the floods recede to even reliably assess the
damage.
Air: The main international airport is in Karachi, although selective international services are available to the
capital Islamabad, Lahore and, less frequently, to Faisalabad, Peshawar, Multan, Gwadar and Quetta. The state
plans to continue to modernise and upgrade its civil aviation facilities and to this end, Lahore's airport has
undergone extensive expansion and modernisation. In Islamabad, a new airport is being built at an estimated cost
of US$400 million since 2007 as the old airport struggles to satisfy demand.
Road: Pakistan's road network is generally in a poor condition; about 63% of the network remains unpaved, while
more than two-thirds of paved arterial roads do not have enough carriageway width for two lanes. It has been
estimated that poorly maintained roads in Pakistan can cause transportation costs to increase by between 30%
and 40%. This is a sizeable cost, considering that 80% of freight and passenger traffic uses the road system.
However, with the help of the World Bank and the Asian Development Bank, among others, services between
main cities have been vastly improved since the 1990s, and improvement works are still ongoing to expand the
country's network of highways.
Rail: Pakistan's rail network is relatively small, comprising 7,718-km broad gauge and 445-km narrow gauge
tracks. Over the past 15 years, there has been a marked shift in freight traffic from rail to highways (railways carry
15% of freight traffic), a trend which the government hopes to reverse because it is placing an increasing strain on
the road system. To do so, Pakistan Railways plan to upgrade the tracks to permit trains to operate at higher
speeds, improve capacity utilisation, upgrade telecommunications and signalling systems and maintain bridges. A
particular concern has been the targeting of the rail infrastructure by militants in Baluchistan as well as on train
services connecting Pakistan with India.
Maritime: Pakistan has three significant seaports: Karachi, Port Qasim and Gwadar. Karachi is the main port,
handling the majority of all dry and liquid cargo. Port Qasim, located 50 km south-east of Karachi, is Pakistan's
second deep-sea port and was built as an overflow facility for Karachi, as well as to handle raw material imports for
Pakistan Steel Mills. A large port at Gwadar, on the Makran Coast near Iran, was inaugurated in December 2008.
This project has created tensions within Baluchistan and increased security problems in the region. Overall,
Pakistan's ports have seen a large increase in the amount of cargo they handle in recent years. To facilitate this
expansion, the government plans to improve the container-handling berths at both Karachi and Port Qasim by
constructing specialised integrated container terminals.
Waterways: Pakistan's waterways are small-scale and limited. The watercourses that are in existence are
generally poorly maintained.
Communications: Pakistan's telecoms sector has witnessed healthy growth over the past few years, particularly
within the mobile sector, as a result of its very forward-looking (by regional standards) and transparent regulatory
regime. Pakistan's focus on the establishment of an effective and clear regulatory system has paid dividends, with
a total of five mobile licences being sold to the private sector—including four to international operators.
Utilities: Three public utilities, the Water and Power Development Administration (WAPDA), the Pakistan Electric
Power Company (PEPCO) and the Karachi Electric Supply Corporation (KESC) are responsible for a significant
amount of the country's electric power generation and distribution, with independent power producers meeting the
remaining energy requirements. Although Pakistan has adequate electricity-generating capacity, the distribution
system cannot meet demand, causing shortages that can be disruptive for business. The Pakistani government's
energy-security plan envisages increasing the country's nuclear power capacity from 425 MW to 8,800 MW by
2030. Water infrastructure is insufficient, with some estimating that less than 20% of the population have
inadequate or no access to safe drinking water, although the government is set to address this in line with the 2009
National Drinking Water Policy.
Infrastructure and Communications Indicators
2005 2006 2007 2008
Container Port Traffic (TEU: 20 foot equiv. units) 1,686,355 1,776,939 1,935,882 1,938,001
Rail Lines (total route-km) 7,791 7,791 7,791 7,791
Roads, Total Network (km) .. 260,420 .. ..
Air Transport, Passengers Carried 5,364,134 5,714,831 5,439,144 5,605,758
International Tourism, Number of Arrivals 798,000 898,000 840,000 823,000

Physical Constraints: Natural Hazards

Pakistan is located in an earthquake zone and is prone to tremors. Quakes can be quite sizeable, and significant recent
seismic events include:
November 2002: The north of the country was hit by a series of shocks that killed 36 people and left 35,000
homeless.
October 2005: The largest earthquake to hit the region since 1935 struck the northern part of the country, with its
epicentre near Muzaffarabad, the capital of Pakistan-administered Kashmir. Large parts of the north and north-east
were affected, with more than 80,000 people killed, more than 100,000 injured and almost four million made
homeless.
October 2008: A 6.5-magnitude earthquake struck 70km north of Quetta, the capital of Baluchistan province in
south-western Pakistan, leaving an estimated 300 dead and another 40,000 homeless. More than 250 aftershocks
hit the region
July/August 2010: Torrential rains in the monsoon season of 2010 caused the worst floods in many parts of
Pakistan in living memory. The floods affected an estimated 20 million people, and at least 1,600 were killed. It will
take months after the floods recede to even assess the extent of the damage, although it is already clear that the
economic, social and political effects will be grave.
Executive Summary: Security Environment Overview

Pakistan's domestic security situation is extremely complex. The massive military campaign of the Pakistani Army against
Islamic militants in the northwest of the country has brought about a de-territorialisation of conflict, meaning that the
danger of terrorist attacks, especially against Western targets, is very high throughout Pakistan. In addition to the
presence of al-Qaida and reformed remnants of the Taliban regime along with their fresh Pakistani recruits, a number of
Islamic extremist groups operate in the country. The massive floods of July and August 2010 have caused considerable
socio-economic hardship to millions of people, and the perceived inadequate response of the government has increased
the risk of militants stepping in to the void, while social unrest and crime are likely to increase. Crime rates are already
high, especially in Karachi, rural Sindh, and Hyderabad. Sectarian violence is common, particularly in Karachi but also in
other cities such as Quetta. Punjab province is subject to sporadic unrest and bombings, while tribal people regularly
stage attacks in Baluchistan and Sindh provinces over land and mineral wealth rights. Foreign firms can face extortion and
kidnapping. See-sawing relations with India pose latent but serious external risks. A peace process between the two
nuclear-armed countries is currently on hold.
Executive Summary: Key Security Issue to Watch

Despite Declaration of Major Anti-Militant Successes the Security Situation Remains Extremely Volatile: Pakistan's
security problems are a major cause for concern, both domestically and internationally. Topping the agenda is the issue of
Islamic extremism. It has become clear that Pakistan, which once fostered the extremist element against the likes of India,
has now become a victim of the problem, with extremist violence now seriously destabilising the country. Since early May
2009 the Pakistani military has waged a decisive military operation against the Pakistani Taliban, and has announced
major strategic victories. However, this is unlikely to bring peace to Pakistan as the Taliban are likely to have been
dispersed, rather than defeated, rendering the conflict a de-territorialised one that is likely to increase insecurity throughout
Pakistan. The Taliban have threatened massive attacks in retaliation for the Pakistani Army’s military campaign, and a
string of well-planned terrorist attacks, including against foreigners, leaves no doubt as to their capabilities to follow up on
this. The massive floods of July and August 2010 have exacerbated the risk of militants gaining public support in areas
where the government response is perceived to be inadequate.
Major Issues: Key Threats and Areas to Avoid
There is an extremely high risk of terrorist attacks, particularly against foreigners throughout the country.
Generally, attacks on foreigners have increased in recent years with militants becoming ever more brazen and
attacking increasingly high-profile targets. The threat of terrorist attacks has become significantly greater since the
military launched a massive military campaign against the Taliban in the northwest of the country in early May
2009. The Taliban have threatened massive attacks in retaliation for the Pakistani Army’s military campaign, and a
string of well-planned terrorist attacks leaves no doubt as to their capabilities to follow up on this. To retaliate for a
range of devastating suspected U.S. drone attacks, the Taliban are now also specifically aiming to hit Western
targets.
Political violence prone to flare up at any time. Currently, political violence poses a major problem in Karachi,
with political killings due to rivalry between the Muttahida Qaumi Movement, the Awami National Party and the
Mohajir Qaumi Movement costing the lives of dozens of people in 2010. However, there is a propensity for political
violence to flare up across the country, over a variety of issues. For example, in early 2009, dissent over the
reinstatement of sacked Supreme Court judges threatened political violence between supporters of Pakistan's
main political parties, the Pakistan Peoples Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N).
Although the issue was eventually resolved, the event once more highlighted the swiftness with which political
violence can be instigated in Pakistan.
Travel to Baluchistan should be avoided. There are several insurgent groups active in Baluchistan that have
fought the federal government over unfair distribution of resources. While insurgent activities have mainly focused
on government installations, foreigners have increasingly been targeted in kidnappings. Travel warnings pertain
particularly to areas outside of Quetta.
Domestic: Crime and Policing

Crime
The commercial centres of most main cities are comparatively safe from all but petty crime during the day. However, crime
rates are generally high, and armed robbery, street violence, random shootings and armed car-jackings occur throughout
the country. Statistics by the Federal Bureau of Police Research & Development reveal a marked increase in crime since
1998, in particular with kidnapping cases having almost doubled from 7,712 cases in 1998 to 15,135 cases in 2008 and
robberies almost tripled from 7,514 cases in 1998 and 19,943 cases in 2008. Socio-economic distress caused by the
massive flooding in July and August 2010, a disastrous economic situation and large numbers of internally displaced
people (IDPs) are likely to further increase crime rates, particularly petty crime.
Crime rates are of particular concern in rural Sindh, where gangs of dacoits (bandits) engage in hold-ups and kidnaps. The
government forbids foreigners to travel in rural areas in the interior of Sindh without an armed escort. However, a growing
number of foreign workers are involved in energy, irrigation and other infrastructure projects in the province making them
targets. Crime is also on the rise in Punjab province, where armed robberies were up by 10% in 2009 compared with the
previous year.
Organised crime is rampant in Pakistan, with criminals and various insurgent groups engaging in a variety of activities,
including drug-trafficking, money-laundering, kidnappings and extortion. Particularly affected by these activities is
Pakistan's southern city of Karachi.
Crime Prevention
Each of the country's four provinces has its own police force, which is independent from the federal government with the
exception of issues of national security. The quality and efficiency of the police is generally regarded as poor, primarily
because of the poor level of pay providing little incentive to perform well. Understaffing and poor training are further
problematic issues. As such, there is regularly little progress on cases, and the police are often accused of
malpractice—particularly the use of torture to extract confessions.
Domestic: Extortion
Regular attempts are made to extort cash from foreign companies or contractors.
Domestic: Kidnapping
Instances of kidnap in Pakistan have increased in recent years and the motives for this sort of activity range from
anti-Western sentiment and bargaining (in the case of Islamic extremists) to the desire for money, and bids to have tribal
grievances addressed (as is often the case in Baluchistan). There have been instances of foreigners being abducted,
usually in tribal areas. In Baluchistan tribesmen have kidnapped foreigners to put pressure on the provincial authorities to
address tribal grievances, release detained kinsmen or return seized arms or goods. Improved security and greater
awareness among foreign companies of the risks has reduced the incidence of attacks, but sporadic kidnappings
continue. In February 2009, a UN worker was abducted by a previously unknown Baluch insurgent group, but released
two months later. A trend that began in 2008 and has continued involves militants in FATA and Khyber Pakhtunkhwa
(formerly North-West Frontier Province) resorting to kidnappings and hostage-taking to impose their demands for the
implementation of Sharia law and the withdrawal of the Pakistani military from the region, a risk that has notably increased
since the Pakistani Army started its offensive against militants in the area in May 2009.
Domestic: Persecution and Political/Ethnic Violence

Pakistan suffers from a low degree of cohesion, with political, ethnic and religious conflicts having become part of
everyday life. Politically, in early 2009 dissent over the reinstatement of sacked Supreme Court judges threatened political
violence between supporters of Pakistan's main political parties, the Pakistan Peoples Party (PPP) and the Pakistan
Muslim League-Nawaz (PML-N). Although the issue was eventually resolved, the event once more highlighted the
swiftness with which political violence can be instigated in Pakistan. Currently, a major focus of political violence is
Karachi, with political killings due to rivalry between the Muttahida Qaumi Movement and the Mohajir Qaumi Movement
costing the lives of dozens of people in 2010. Religious violence is rampant in most parts of the country, although
particular hotspots are Khyber Pakthunkhwa (formerly North-West Frontier Province) and the Federally Administered
Tribal Areas (FATA). Clashes and selective killings by members of rival Muslim Sunni and Shi-ite militant groups are
commonplace, especially during religious occasions such as the Muslim holy month of Muharram ul-Harram. Ethnic
nationalism has become a particular problem in Baluchistan, with several Baluch insurgent groups having staged
numerous attacks on government installations in the province.
Domestic: Terrorism
Terrorism
Pakistan has been badly affected by terrorism in its recent history. According to the South Asia Terrorism Portal (SATP),
more than 30,000 people have lost their lives due to terrorist attacks between 2003 and 2010, and a recent surge in
terrorist attacks implies that fatality figures will rise significantly. The present situation suggests that terrorist attacks can
occur anytime, anywhere, and against anyone in Pakistan. Security forces, government buildings and infrastructure, and
establishments frequented by foreigners are prime targets.
Most terrorist activities in Pakistan emanate from a variety of Islamic extremist groups. Although many of the groups have
pooled their resources and capabilities in recent years, the background of groups is highly diverse. A common aspect of
most of these groups is that most of them were supported by state agencies at some point in time: the Taliban were
officially supported by the United States and Pakistan in order to push back the Soviet invasion and, after this succeeded,
to keep checks and balances against Pashtun nationalism by fuelling religious extremism. Pakistan also supported groups
such as the Lashkar-e-Toiba (LeT) in Jammu and Kashmir that waged a proxy war against India. Most of these groups
have turned against the government at some point in time since the government has pledged support to the U.S.'s war
against terrorism. In general, the frequency of terrorist attacks has consistently increased since 2003, and so did the
number of casualties. Of particular concern is the rise in terrorist attacks since May 2009, that are believed to be carried
out in response to the Pakistani Army's massive military operation against Islamic militants in the northwest of the country.
Terrorist activities are also carried out by a number of separatist groups in Baluchistan. Different from the religiously
motivated terrorist attacks, these are mainly directed against government targets such as trains and harbours. However,
foreigners have been caught up in these group’s activities.
Assassination Attempts
Key figures in Pakistan have often been subject to assassination attempts, but in 2004 efforts became more concerted. It
was held that key policies, particularly the government's continued support for the war on terror and military operations in
the north-eastern region of South Waziristan, prompted hard-liners to target key ministers and military figures.
Assassination attempts have been made on Pakistan's secular opposition leaders, Benazir Bhutto and Nawaz Sharif,
following their return to Pakistan in October and November 2007 respectively. A failed assassination attempt on Bhutto
when she returned to Karachi in October claimed the lives of 140 of her supporters. She was then killed in December the
same year when her car came under attack from gunfire and a suicide bomber as she was leaving a campaign rally in
Rawalpindi, Punjab. Sharif has also been targeted as militants attempted to disrupt Pakistan’s parliamentary election and
the return to secular democratic rule. Since the Pakistani military began its offensive against the Taliban in the northwest
of the country in May 2009, the Taliban have threatened to kill Pakistan's political leadership and their close relatives.
Major Terrorist Groups
A number of Islamic extremist groups are based in Pakistan, some of which are involved in domestic sectarian violence,
while others have wider links to groups such as al-Qaida. There are also a number of separatist terrorist groups in
Baluchistan. Terrorist groups in Pakistan include the following:
Al-Qaida
Unlike neighbouring Afghanistan, Pakistan never gave al-Qaida and its leadership official protection or a legitimate
base. That said, it is known that a number of extremist groups and elements within the armed forces, the
intelligence agencies and political parties had links with both al-Qaida and the Taliban. This has made it difficult for
the authorities to flush out these elements because of the sympathy that continues to be shown for them in some
influential quarters. In addition to this, the security forces have encountered considerable problems in their
counter-terrorism operations; tracking down these individuals is logistically difficult, made all the more so by the
harsh terrain, porous border and lack of co-operation afforded in the largely autonomous border areas. Factors
such as these have prompted the conclusion that it will be extremely difficult for the government to eradicate the
Islamic extremist presence, despite continuing counter-terrorism measures. Under severe U.S. pressure, the
Pakistani military launched an unprecedented and continuing military offensive against Islamic extremists in much
of the Federally Administered Tribal Areas (FATA) and Khyber Pakhtunkhwa (formerly North-West Frontier
Province) in early May 2009, and as of early 2010 is increasingly taking on al-Qaida.
Tehrik-e-Taliban-Pakistan (Pakistani Taliban/Taliban Movement of Pakistan)

The Tehrik-e-Taliban Pakistan (TTP) was formed in December 2007 as an umbrella group that would enable the
numerous pro-Taliban groups operating in the Federally Administered Tribal Areas (FATA) and Khyber
Pakhtunkhwa (formerly the NWFP) of Pakistan to co-ordinate their activities and consolidate their growing
influence in the region. The constituents of the TTP already posed a significant threat throughout FATA and in
areas of Khyber Pakhtunkhwa, regularly confronting and defeating Pakistani security forces, while their ability to
deploy suicide bombers made them a threat throughout the rest of Pakistan, even in military strongholds such as
the garrison city of Rawalpindi. In addition, their control of much of the Afghanistan-Pakistan border has enabled
them to forge strong operational links with the Afghan Taliban. Like the Afghan Taliban, the TTP's ultimate
objective is the creation of an Islamic emirate governed according to their fundamentalist Deobandi interpretation
of Sharia (Islamic law). However, unlike earlier Pakistani Taliban groups which focused solely on supporting the
Afghan Taliban against the U.S.-led coalition, the TTP is explicitly revolutionary, and is committed to overthrowing
the Pakistani government. Following the failure of two high-profile government peace initiatives, military operations
against the group have increased, particularly in Bajaur Agency in August 2008, Swat in April/May 2009, and
South Waziristan in October 2009. The TTP suffered an additional setback in August 2009 when its founder and
inspirational leader, Baitullah Mehsud, was killed. However, the TTP remains a powerful force on the ground in
Pakistan's tribal areas under the new leadership of Hakimullah Mehsud, and remains capable of conducting
high-yield suicide bomb attacks on hard targets throughout the country, as was demonstrated by a series of major
attacks in October 2009. The TTP also demonstrated that it possessed both the capability and the intent to carry
out attacks on hard targets in Afghanistan when it carried out a high-profile suicide attack on a U.S. base in Khost
in late December 2009, which left seven CIA operatives dead. U.S. authorities have accused the group of being
behind the 1 May failed bombing in New York's Times Square, which, if confirmed, would signify a notable
expansion of the group's capabilities.
Lashkar-e-Toiba (LeT)
Lashar-e-Toiba is a Pakistani militant Islamist group based in Pakistan and operating in India, and is one of the
most capable and high-profile militant groups currently active in South Asia. It was formed in 1990 with the specific
objective of waging irregular warfare in the disputed territory of Indian-administered Kashmir (IAK), which currently
forms part of the Indian state of Jammu and Kashmir, but which is claimed by Pakistan. Although supporting
Kashmiri separatism in Muslim-majority IAK remains the LeT's primary focus, over the past decade the group has
increasingly expanded its area of operations into mainland India, and ultimately the group aims to establish a
series of Islamist administrations throughout the Indian sub-continent. The group is suspected of responsibility for,
or involvement in, several high-profile attacks on Indian cities, most notably the December 2001 attack on India's
parliament in Delhi, and the co-ordinated attacks on the city of Mumbai in November 2008. To date, the LeT has
not been blamed for any attacks within Pakistan itself, and Indian authorities have long alleged that the LeT is
essentially a proxy force for Pakistan's Directorate for Inter-Services Intelligence (ISI). Although the Pakistani
government cracked down on the group in the years following the 11 September 2001 attacks in the United States,
and again following the November 2008 Mumbai attacks, the LeT continues to have the capability and the intent to
carry out both targeted and mass-casualty attacks. As such, the LeT remains a highly significant threat to the
Indian state, both in IAK and in major urban centres throughout the country.
Jaish-e-Mohammad (also known as Khuddam-i-Islami)

Jaish-e-Mohammed (JeM), or Army of the Prophet Muhammad, JeM is also sometimes referenced as
Jaish-e-Mohammed-e-Tanzeem. The group was banned by the Indian government in October 2001, designated a
Foreign Terrorist Organisation (FTO) by the United States in December 2001, and banned by the Pakistani
government in January 2002. On 23 December 2003, the U.S. Department of State announced it had amended the
designation of Jaish-e-Mohammed pursuant to Executive Order 13224 (concerning terrorism financing) to add the
following names as aliases: Khuddam-ul-Islam, Khudamul Islam, and Kuddam e Islami. JeM was banned in
Pakistan under the name Khuddam-ul-Islam in November 2003. The governments of Australia, Canada and the
United Kingdom have also listed the group as a terrorist organisation.
Jamaat-ul Furqan
A splinter organisation of the JeM, this faction has been linked to four terrorist attacks perpetrated in 2002: the
murder of U.S. journalist Daniel Pearl; the bombing of a church in Islamabad; a grenade attack on a Christian
hospital chapel; and an attack on a Christian school. In August 2006, the government reportedly cracked down on
the JuF. Local newspaper Dawn reported that the move came after intelligence suggested that the JuF was
planning to hit Western targets in Pakistan, and particularly British and American interests due to their involvement
in Afghanistan. The JuF is believed to have backing from the al-Qaida network, and is linked to the Al Jehad group
formed by an al-Qaida leader in Waziristan (FATA). It was also claimed that a key member in the alleged plot to
blow up a number of transatlantic planes in August 2006 was a JuF member.
Harkat-ul-Mujahideen (HuM; also known as the Jamiat-ul-Ansar)

The HuM is currently one of the most active militant groups within Indian-administered Kashmir. Originally known
as Harakat ul-Ansar, which was itself designated a foreign terrorist organisation in October 1997, the party went on
to become the Harkat-ul-Mujahideen (HuM), an Islamic militant group based in Pakistan that operated mainly in
Kashmir. HuM was banned in November 2001, and went on to rename itself as Jamiat-ul-Ansar, which also
comprised a breakaway faction of another group, Harkat-ul Jihad-e-Islami (HJI). HuM leader Fazlur Rehman Khalil
has been linked to al-Qaida leader Osama Bin Laden, and he signed Bin Laden's fatwa in February 1998, calling
for attacks on US and Western interests. The group suffered casualties in the US missile strikes on Bin
Laden-associated training camps in Khowst during August 1998. As well as masterminding numerous attacks on
Indian security targets in Kashmir, the group is also believed to have been responsible for the 1994 kidnapping of
six foreign trekkers in the region. Its most high-profile act to date was the hijacking of an Indian Airlines flight en
route from India to Nepal in December 1999. The group frequently denies involvement in episodes that are likely to
incur the wrath of the international community.
Various Baluch Insurgent Groups

There are a number of insurgent groups in Baluchistan, most of which have come into being to fight unequal
resource allocation between federal units, as benefits received by Baluchistan in no respect match its rich resource
base. During 2008, violence in Baluchistan saw a marked increase with at least 348 people killed as opposed to
245 the previous year. In 2009 violence increased further, particularly with the formal end of a unilateral ceasefire
in January 2009 that was declared by the principal Baluch insurgent groups, the Baluch Liberation Army (BLA), the
Baluch Republican Army (BRA) and the Baluch Liberation Front (BLF) in September the previous year. In February
2009 for the first time during the insurgency a foreigner was abducted. While there is no link between the Baluch
insurgency and the Islamic extremist network further north, the insurgency adds to an already extremely unstable
security environment in Pakistan.
Counter-Terrorism
Legislation
The government strengthened its counter-terrorism laws in January 2004, when the cabinet agreed the amendments to
the 1997 Anti-Terrorism Act, doubling the punishment for those found guilty of financing terrorism up to 10 years, and
making this type of activity a non-bailable offence. The amendments are in line with United Nations Security Council
Resolution 1373, which was passed shortly after the September 11, 2001 terrorist attacks on the United States.
This legislation has been employed in the government's moves to ban a number of extremist groups (see above). Under
the act's provisions, the authorities have previously used their powers to shut down around 150 of the banned
organisations' offices and centres, frozen the assets of the groups, and compelled nearly 600 activists to pay a bond of up
to 100,000 rupees as surety for good behaviour. This measure has been employed after the mass arrests of a previous
crackdown were rendered ineffective when the detainees were released uncharged.
Laws were again tightened in October 2004 in response to sectarian violence. Under the amendments, changes were
made to provide better classification with regard to issues such as bomb attacks and the use of explosives in places of
worship as terrorist acts. The bill also attempted to enhance minimum and maximum punishments for acts of terrorism. In
addition, there were new punishments for those found guilty of providing support—either financial or logistical—to
terrorists.
Currently the Pakistani military is pushing for tougher anti-terror laws as it views current legislation as insufficient to put
militants on trial.
Military Operations
Beyond this, security forces have launched a number of operations against al-Qaida and Taliban members, many of whom
took refuge in the country following the start of U.S.-led military action in Afghanistan in 2001. There are regular military
operations against militants, particularly in the border areas with Afghanistan and the tribal areas in the south-west. In May
2009, the Pakistani Army, under severe pressure from the United States, decided to clamp down more decisively against
militants in FATA and the NWFP. Although successive victories were declared throughout 2009, including in Swat valley,
military operations continue in South Waziristan, and militant activity has continued in Swat. Notably, the military offensive
has also brought about a deterritorialisation of conflict, with militants increasingly and more frequently attacking targets
throughout Pakistan, including in the urban centres of Islamabad, Lahore, Karachi and Peshawar.
External: Threats
Afghanistan
Pakistan has long used Afghanistan as a location in which to play out its wider battles, with recent history seeing it support
the Taliban regime against the Indian-backed Northern Alliance (NA), before the Taliban's fall in 2001. It failed in its efforts
to include moderate Taliban elements in the post-conflict administration, and has therefore settled on a policy of
reconciliation. However, tensions remain, as shown by Afghanistan's frustration with continued attacks on its soil, which it
claims are carried out by Taliban and al-Qaida remnants based in Pakistan's border areas, while Pakistan makes similar
counter-claims. Although ties nominally improved, they have deteriorated in recent years. The departure of Musharraf
helped the situation to some degree, given the hostility that had developed between the two men. Zardari has made
attempts to reach out to Karzai, and notably the Afghan president was the only foreign leader to attend Zardari's
inauguration. Still, broader pressures and long-standing mistrust dog the relationship. This poses a problem for the U.S.
administration, which is pressing for the two countries to work a lot more closely together in a bid to employ a regional
approach to the problem of Islamic extremism.
A key issue that still needs addressing is the large number of Afghan refugees residing in Pakistan and Iran. In total,
around 2.3 million refugees were returned between 2001 and early-2005, although a further 1.7 million are estimated to
still be residing on Pakistani soil in 2010. Afghan refugees are currently permitted to live and work in Pakistan until the end
of 2012. However, since Afghan refugees put an additional burden on an already extremely tense economic situation and
employment market in Pakistan, the United Nations High Commissioner for Refugees (UNHCR) has begun to resettle
some of the refugees to third countries.
One feature that has the potential to strengthen relations between the two countries in the longer term is a gas pipeline,
which is currently planned to travel through Afghanistan from Turkmenistan and into Pakistan. This has the potential to
yield significant revenues, and will require a consistent degree of co-operation between all three governments.
Nonetheless, it will be necessary to address the core issues to improve bilateral relations, particularly Pashtun
nationalism, growing Islamic extremism, and the disputed status of the Durand line between the two countries. They were
addressed in a "Joint Pakistan-Afghanistan Peace Jirga" (tribal assembly) in Kabul in 2007, which is to be followed up by a
series of "Jirgagai" or smaller jirgas, the first of which was held in October 2008 in Islamabad. However, these initiatives
have made little discernible progress so far.
India
Pakistan's relations with India have long been fraught, and the country remains Pakistan's most significant external threat;
the unresolved Kashmir conflict constitutes one of the world's most dangerous troublespots. Three wars have taken place
over the territory since 1947, as well as a localised conflict in 1999. The most recent major stand-off between the two
countries came in 2002, prompted initially by an attack on India's parliament by Pakistan-based militants. Bowing to
international and Indian pressure, Pakistan launched a crackdown on the groups thought to be behind the raid, but many
measures were only implemented half-heartedly. The risk of full-scale conflict came to a head in May 2002, when militants
attacked an army base in Kashmir. Troop levels on both sides of the border reached a scale unprecedented during
peacetime, and the rhetoric between the two countries became alarmingly bellicose. Considerable international diplomacy
was brought to bear on the nuclear-armed neighbours, and the situation slowly defused.
Both India and Pakistan are well aware that war would not advance the agenda of either government, although it might
bring short-term populist rewards. Any ”surgical” strike by India would almost certainly prompt Pakistan to retaliate with its
own offensive. Any conflict would have the potential to escalate quickly, especially if Pakistan felt itself to be cornered, and
there is no guarantee that nuclear weapons would not be used, even though both countries espouse the policy of ”no first
use”. Beyond this, it is feared that in the light of continuing tensions the two sides will enter into an arms race. India has
traditionally been, and remains, the dominant country in terms of size, military capability and economic might; Pakistan
has sought to redress the balance with high levels of defence spending. Both countries have nuclear missiles, and with
restrictions on military aid lifted in light of their support for the U.S.-led war on terror, they increasingly have the ability to
expand their arsenals. The U.S.-India nuclear agreement has added an additional source of friction to the India-Pakistan
relationship, with concerns that if it is implemented it may further fuel a nuclear arms race in South Asia.
External: Military Capabilities

Military Spending and Personnel Indicators
2006 2007 2008 2009
Military Personnel, Total 923,000 921,000 921,000 ..
Military Expenditure (% of central
25.1 23.0 .. ..
government expenditure)
Military Expenditure (current LCU) 292,100,000,000 325,400,000,000 361,300,000,000 409,600,000,000
Arms Imports (constant 1990 US$) 262 605 1,094 ..

This information was last updated on Thu 22 Jul 2010, 1:41 PM EDT (17:41 GMT)
Overall
Pakistan suffers a fundamental lack of stability. Politically, the country has see-sawed between democracy and military
rule throughout its history. Currently, it is under weak civilian rule, headed by the populist Pakistan People's Party (PPP).
The federal government is fragile, faces mounting opposition from the country's other main party, the Pakistan Muslim
League-Nawaz (PML-N), and generally is overwhelmed by the country's myriad problems. Among these are: massive
security problems due to widespread militancy, especially in the Northwest; major economic instability; poor international
relations, particularly with neighbours, India and Afghanistan; and natural resource shortages. More broadly, Pakistan has
a history of institutional weakness, poor governance and corruption. There is great concern over the lack of accountability
of Pakistan's intelligence agencies to the federal government. Furthermore, there are huge discrepancies in terms of
economic and social opportunities between Pakistan's four provinces, as well as the Federally Administered Tribal Areas
(FATA) that have sparked social unrest throughout the country. In Baluchistan, there is an ongoing insurgency against the
federal government over federal resource allocations that have been inadequately addressed by successive governments.
On the economic front, Pakistan continues to face sizeable difficulties. While the influx of petro-dollars and the
government’s welcoming attitude to foreign investment boosted FDI initially, Pakistan remains an extremely difficult
country in operational terms. The country's infrastructure requires significant development, and while the tax and legal
systems are being reformed slowly, much more work needs to be done and there are questions over the judiciary’s
strength and training. Pakistan's security situation is deteriorating, and risks for investors are extreme.
Analyst Contact Details: Jan Zalewski, Hanna Luchnikava
Pakistan: Country Reports - Recent Analysis
Country
1. Two Killed in Bomb Attack in South-West Pakistan
(Thu 28 Oct 2010)
Economic
2. FY 2009/10 Growth in Pakistan Confirmed at 4.1%, Current Year Outlook Shadowed by Floods
(Wed 27 Oct 2010)
Country
3. Russia Considers Involvement in Turkmenistan-India Gas Pipeline Construction
(Mon 25 Oct 2010)
Country
4. U.S. Eyes More Support for Pakistan
(Fri 22 Oct 2010)
Country
5. Pakistan Rubbishes Bin Laden Claims
(Tue 19 Oct 2010)
Country
6. Violence Hits Pakistani City of Karachi Following By-Election
(Mon 18 Oct 2010)
Economic
7. World Bank and ADB Estimate Pakistan's Reconstruction Cost at US$30 Bil., 30% Below Initial
Projection
(Fri 15 Oct 2010)
Economic
8. Pakistan's CPI Inflation Sharply Higher on Elevated Food Prices, Trade Deficit Widens in September
(Wed 13 Oct 2010)
Country
9. Pakistan Resumes NATO Access to Crucial Border Crossing with Afghanistan
(Tue 12 Oct 2010)
Country
10. Pakistani Supreme Court Refuses Government Request to Delay Reopening of Graft Charges
(Tue 12 Oct 2010)
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IHS Global Insight Report: Pakistan (Country Intelligence)

Report printed on 30 October 2010

Country Reports >

Executive Summary: Key Issues to Watch

Militants Remain Potent Despite Large-Scale Military

Overall 4.01 Very High

Download this table in Microsoft Excel format

Executive Summary: Political Outlook

Executive Summary: Political Data

Prime Minister; Information Technology Yusuf Raza GILANI 25 March 2008

Minister of Finance Abdul Hafiz SHEIKH 05 June 2010

Minister of Investment and Privatization Waqar Ahmed KHAN 27 April 2009

Minister of Foreign Affairs Makhdoom Shah Mehmood QURESHI 25 March 2008

Minister of Defence Chaudhry Ahmed MUKHTAR 25 March 2008

Minister of Defence Production (vacant) 27 September 2010

Minister of Petroleum and Natural Resources Naveed QAMAR 08 August 2009

Minister of Labour and Manpower Khursheed Ahmed SHAH 03 November 2008

Minister of the Interior Rehman MALIK 03 November 2008

Minister of Ports and Shipping Babar GHAURI 27 April 2009

Minister of Railways Ghulam Ahmed BILOUR 03 November 2008

Minister of Health Makhdoom SHAHABUDDIN 10 December 2009

Minister of Education Asif ALI 05 June 2010

Senior Minister; Minister of Commerce Makhdoom Amin FAHIM 03 November 2008

National Assembly (Lower chamber) Pakistan Muslim League (Nawaz) PML(N) 68

National Assembly (Lower chamber) Women W 60

National Assembly (Lower chamber) Pakistan Muslim League (Quaid-e-Azam) PML(Q) 42

National Assembly (Lower chamber) Independents Ind 29

National Assembly (Lower chamber) Others Others 25

National Assembly (Lower chamber) Muttahida Qaumi Movement MQM 19

National Assembly (Lower chamber) Non-Muslim minorities N-M 10

Senate (Upper chamber) Pakistan People's Party (Parliamentarians) PPP 27

Senate (Upper chamber) Others Others 23

Senate (Upper chamber) Pakistan Muslim League (Quaid-e-Azam) PML(Q) 21

Senate (Upper chamber) Independents Ind 13

Senate (Upper chamber) Muttahida Majlis-e-Amal MMA 9

Senate (Upper chamber) Pakistan Muslim League (Nawaz) PML(N) 7

Executive Summary: Economic Outlook

Executive Summary: Selected Charts and Data

Download this table in Microsoft Excel format

Executive Summary: Key Sectors

(Bil. US$) (Real terms) (Nominal terms)

1. Agriculture 29.9 -3.1 17.8

2. Retail Trade - Total 13.8 0.0 8.2

3. Wholesale Trade 11.1 -0.3 6.6

4. Public Admin. and Defense 10.0 0.9 5.9

5. Telecommunications 9.0 1.4 5.3

6. Health and Social Services 7.5 1.4 4.4

7. Hotels and Restaurants 6.7 -0.4 4.0

8. Education 5.8 1.1 3.5

9. Oil and Gas Mining 5.6 0.1 3.3

10. Construction 3.7 -1.2 2.2

Top-10 Total 103.1 61.3

Updated: Aug 25, 2009

Executive Summary: Key Trading Partners

Country Billion US$ Share (%) Country Billion US$ Share (%)

United States 3.480 16.094 China 6.591 14.282

United Arab Emirates 2.538 11.735 Saudi Arabia 5.621 12.181

Afghanistan 1.865 8.625 United Arab Emirates 5.223 11.319

China 0.916 4.234 United States 2.192 4.751

Germany 0.827 3.822 Malaysia 1.906 4.130

Saudi Arabia 0.717 3.316 India 1.704 3.693

Italy 0.662 3.062 Japan 1.599 3.466